Should I Claim my Adult Child with a Disability as a Dependent?

In last month’s Disability Insights, various tax issues of particular importance to individuals and families with disabilities were discussed. In this article, we take a more in depth look at one of those topics addressed: the topic of claiming your adult child as a dependent.  
When the Tax Cuts and Jobs Act passed in late 2017, families lost the ability to count dependents as exemptions (a deduction of $4,050 at that time). Even with the loss of this exemption, claiming the adult child as a dependent may still be beneficial to special needs families because this enables them to qualify for substantial tax credits discussed below and at ( see January 2019 Disability Insights article) For example, for families with children 17 or under, being a dependent provides families with a tax credit of $2,000. For special needs families with an adult child 18 or older however, it is more complicated to determine if it is worth claiming the adult child as a dependent or not.  Assuming the child qualifies for dependency (discussed below) one needs to considers the impact on not only the family’s taxes but the individual’s benefits as well. 

IRS Dependency Criteria Qualifying ChildAccording to Table 5 of IRS publication 501, a qualifying child must meet the following criteria:
a.)    Bears a relationship to the taxpayer
b.)    Has the same principal place of abode as the taxpayer for more than one half of the year
c.)    Meets the age requirement (age requirement)
d.)    Does not provide for over half their support (support rule)
e.)    Has not filed a joint return (person is not married)

Qualifying Child and the Age RequirementNormally to qualify to be a dependent the child would need to be under age 18 (unless they attend college in which case the age is under 24); however persons with a disability qualify under any age. The family or individual will need to show that the disability is diagnosed by doctor and that the child is unable to engage in “substantial and gainful activity” due the disability.

Qualifying Child and the Support ruleDoes the family provide 51% of the adult child’s needs? This is not a straight forward calculation.  The definition of support includes all household expenses including mortgage, food, property taxes and utilities provided to the adult child. Social Security payments to the child would count as the child’s support. Keep good records to show that you are providing over half your child’s support.  

Qualifying RelativeFor those individuals that live outside the home independently, the individual could still qualify as a dependent if they meet the definition of qualifying relative. Again referring to Table 5 of IRS publication 501 the definition includes:
a.)    Bears a relationship to the taxpayer
b.)    Gross income less than $4,150 in 2018 – threshold increased annually
c.)    Does not provide over half of their support
d.)    Not being claimed as a dependent by any other person

Qualifying Relative and Gross Income TestImportantly, SSI benefits do not count towards the $4,150 threshold (although it may count towards the total support provided.) Likewise income earned in a sheltered workshop does not count as gross income for the adult child; however, the IRS states in publication 501 that the main reason for the child’s participation at the work shop must be because of the availability of medical care.    Please note that the individual’s gross income may include Social Security Disability Benefits (SSDI) if the child’s income is high enough (the current threshold for taxing SSDI benefits for single person is $25K.)

Impact of Dependency on the Family’s TaxesAssuming the adult child does qualify for being claimed as a dependent, families with a qualifying adult child can reduce their taxes in the following ways: 1) through classification of the favorable tax status of “head of household” – single households with a qualifying dependent 2) by taking advantage of the child care & dependent credit – this applies to adult dependents and finally 3) through eligibility for a $500 refundable credit, newly begun in 2018. Remember that regardless if the child is claimed as a dependent, the individual may need to file their own tax return depending on the amount of income earned (this topic will be addressed in the next issue of Disability Insights.)

Inter Relationship Between Dependency and Child’s BenefitsEven if your adult child does qualify as a dependent, one has to be mindful of how dependency may effect your child’s public assistance benefits, particularly SSI.  For example not charging your adult child rent may help you claim your child as a dependent, but may also reduce their SSI benefits up to one third since this benefit is provided for less than the “fair share” of your housing and food costs.  
Determining if it is beneficial to claim your adult child as a dependent is not a straightforward calculation. First, you need to assess if the child meets the IRS criteria for a qualifying child or qualifying relative. Then you need to consider the potential impact on the benefits of the individual. Special needs families will want to consult with a tax and finance professional to determine if it is worthwhile to claim their adult child as a dependent or not.