Claim Child as Dependent or File Separate

[1420tigre]

My children received unemployment in 2020 and if they file their own as a dependent they have a huge tax burden, but if I do not claim them their taxes are much less.

Can I NOT claim them on mine even if they live with me?

Options:

1 - I claim them as a dependent and get the tax deduction but they pay $6000 in taxes

2 - I DONT claim them on my taxes and they pay $550 in taxes.

[ColeenD3]

If they are your dependent, you are not required to claim them but you might as well. If they are qualified to be someone's dependent, they must say so on their return. So, whether they are claimed or not, they will be treated as if they were. See the screenshot below.

[Opus 17]

Your child must check the box that says "I can be claimed as a dependent" if they can be claimed, even if they don't want to be claimed.  Unfortunately, unemployment compensation is "unearned income" and dependents don't get the usual standard deduction applied to unearned income.  However, $6000 in tax seems impossible, that would imply total income close over $40,000.  Even if it was $3000 per child for two children, that would imply income of $25,000 per child, counting wages and unemployment. 

Your child who lives with you can be claimed as a dependent if they meet the following tests,

1. Qualifying child rules

1. Age under 19, or a fill time student under age 24
2. Does not provide more than half their own support

2. Qualifying relative rules

1. Any age
2. You provided more than half their total support
3. Their taxable income is less than $4300.

(There are other tests that I did not mention because they already meet them as you described your question.)

You will need to carefully consider their income, and how much support you provide them (including the value of room and board) compared to how much of their own expenses they pay.  Given the amount of income they seem to have, I think it would be hard for you to be providing more than half their support, unless you live in a mansion where your mortgage is so substantial that 1/3 or 1/4 of the mortgage payment allocated to each child is more than their total income. 

[1420tigre]

Thanks for the answer.  They are being taxed at 34.1% and made just under $18,000 and add to that the state taxes.  That is where the ~$6k is coming from

[1420tigre]

Also, TurboTax is saying they only get a $1,100 deduction

[Opus 17]

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@1420tigre wrote:

Also, TurboTax is saying they only get a $1,100 deduction

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Yes, that's the "kiddie tax."  The point of the kiddie tax is to prevent parents from hiding investment income by putting it in the name of their kids who get a lower tax rate.  It applies to all "unearned income" which includes investment income but unfortunately also includes unemployment insurance.  You can read about it more here. https://www.irs.gov/taxtopics/tc553

https://www.irs.gov/pub/irs-pdf/i8615.pdf

https://www.irs.gov/publications/p929

The kiddie tax only applies if the child is under age 19 and did not provide their own support, or under 24 and also a full time student.  I would be surprised if $18K of income does not constitute more than half their own support, which would cause them to not be claimable as a dependent.  I'm also surprised that an 18 year old, or a college student, would qualify for $18K of unemployment compensation, that's a lot of generosity from the state.  

If you can't honestly state that the child provided more than half their own support, then they have to pay the tax, and $12K of unemployment (net after taxes) is still way more money than I made when I was a teen.  

[JohnW152]

That’s correct.  The standard deduction for a dependent is generally $1,100, or their earned income plus $350 with a $12,400 maximum, whichever is greater.

According to IRS Publication 17, Your Federal Income Tax,

The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to the greater of:

• $1,100, or
• The individual's earned income for the year plus $350 (but not more than the regular standard deduction amount, generally $12,400).

However, if the individual is 65 or older or blind, the standard deduction may be higher.