What Does the Dependency Exemption Mean for Taxes?

The dependency exemption was a deduction in the U.S. tax code that allowed taxpayers to reduce their taxable income for each person they financially supported, which in turn lowered their tax bill. A legislative overhaul suspended this deduction for federal taxes from 2018 through 2025. While the exemption is gone from federal returns, the underlying concept of a “dependent” remains a core component of the tax system, influencing eligibility for other tax benefits.

The Suspension and Replacement of Federal Exemptions

The Tax Cuts and Jobs Act of 2017 (TCJA) brought changes to the Internal Revenue Code, including the suspension of personal and dependency exemptions. This change took effect for the 2018 tax year and is scheduled to last through 2025. Instead of allowing taxpayers to deduct a set amount per dependent, the TCJA reduced the exemption amount to zero.

To compensate for the removal of the dependency exemption, the TCJA made two other adjustments. It nearly doubled the standard deduction, which simplifies tax filing and reduces taxable income for a broad range of filers. The law also expanded tax credits, increasing the Child Tax Credit from $1,000 to $2,000 per qualifying child and introducing a new $500 Credit for Other Dependents.

These credits are more advantageous for many families than the old exemption. A deduction reduces taxable income, with the final savings depending on the taxpayer’s tax bracket. A credit, on the other hand, provides a dollar-for-dollar reduction of the actual tax owed, making it a more direct benefit, particularly for lower and middle-income households.

Determining Who Qualifies as a Dependent

Even with the exemption suspended, correctly identifying dependents is necessary for claiming the tax credits that replaced it. The Internal Revenue Service (IRS) provides two sets of tests to determine if an individual can be claimed as a dependent: one for a “Qualifying Child” and another for a “Qualifying Relative.” A person can only be claimed if they meet all the requirements of one of these categories.

Qualifying Child

To be claimed as a qualifying child, an individual must meet five specific tests.

• Relationship test: The child must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, or a descendant of any of these individuals.
• Age test: The child must be under age 19 at the end of the tax year, or under age 24 if a full-time student for at least five months of the year. There is no age limit for a child who is permanently and totally disabled.
• Residency test: The child must have lived with the taxpayer for more than half of the year.
• Support test: The child cannot have provided more than half of their own financial support during the year.
• Joint return test: The child cannot file a joint tax return with a spouse for the year, unless it is filed only to claim a refund of withheld taxes.

In situations where a child meets the qualifying child rules for more than one person, the IRS has tie-breaker rules. These rules give the parent the right to claim the child. If both potential claimants are parents, the parent with whom the child lived for the most time during the year gets to claim the dependent.

Qualifying Relative

If an individual does not meet the tests to be a qualifying child, they might still be claimed as a qualifying relative. This category has four distinct tests.

• Not a qualifying child test: The person cannot be your qualifying child or the qualifying child of any other taxpayer.
• Member of household or relationship test: The person must live with the taxpayer all year as a member of their household or be related to the taxpayer in one of the ways specified by the IRS, such as a parent, grandparent, aunt, or uncle.
• Gross income test: The person’s income must be below a certain amount for the year; for 2024, this amount is $5,050.
• Support test: The taxpayer must have provided more than half of the person’s total support for the entire year.

How to Claim a Dependent on Your Federal Tax Return

Once you have determined that an individual meets the tests for a qualifying child or relative, the next step is to claim them on your federal income tax return, Form 1040. In the section designated for dependents, you must provide their full name, Social Security Number (SSN), and their relationship to you. You must also check a box indicating whether the dependent qualifies for the Child Tax Credit or the Credit for Other Dependents.

After listing the dependents, you can then claim the specific tax credits for which you are eligible. For example, the Child Tax Credit is calculated and claimed using Schedule 8812. The information you enter in the dependents section of Form 1040 directly links to your eligibility for these credits.

State-Level Dependency Exemptions

The suspension of the dependency exemption by the TCJA applies specifically to federal income taxes. State tax laws are separate and do not always follow the federal framework, so the treatment of dependency exemptions varies significantly from one state to another.

Some states have tax codes that automatically “conform” to the Internal Revenue Code, which meant the state-level exemption was also eliminated. Other states have “decoupled” from the federal provision, either by passing legislation to retain their own dependency exemption or by having pre-existing laws that were unaffected by the federal change. This means you might still be able to claim a dependency exemption on your state income tax return. It is important to consult the instructions for your specific state’s department of revenue to see if a dependency exemption is available.