Working Families Tax Relief Act

The Working Families Tax Relief Act of 2004 (WFTRA) changed the definition of dependent under IRC § 152, effective in 2005.  The consequences of this change are that an employee’s taxable earnings may be affected if he or she has health plan coverage for a natural or adopted child who does not meet the IRS definition of a qualifying tax dependent.

IRS Definition

As defined in IRC §152, a “qualifying child” must be the natural or adopted child of the taxpayer (or bear other specified relationship to the taxpayer) and also meet the following requirements:

• have the same principal place of abode as the taxpayer for more than one-half of the taxable year;
• satisfy age requirements (i.e., must not have attained age 19 before the close of the calendar year in which the taxable year of the taxpayer begins if not a student or, if a student, must not have attained age 24 before the close of the calendar year in which the taxable year of the taxpayer begins, or must be permanently and totally disabled); and
• not have provided over one-half of such individual’s own support for the calendar year in which the taxable year of the taxpayer begins (excluding scholarships).
• Please note:  The ACA expanded tax-free coverage to children until the end of the year in which they turn 26 so that the age limit, residency, support, and other tests described in Code Section 152(c) do not apply with respect to such a child for determining the tax exclusion.

The Fostering Connections to Success and Increasing Adoptions Acts of 2008 makes three changes to IRC § 152(c) definition of a “qualifying child” effective for taxable years beginning after 2008.

• The child must be younger than the taxpayer.
• The child must be unmarried, i.e. cannot have filed a joint return with his or her spouse for the taxable year beginning in the same calendar year as the taxpayer’s tax year.
• The child is allowed to be treated as the qualifying child of a nonparent if:
  • No parent claims the individual as a qualifying child, and
  • The nonparent has a higher adjusted gross income than any parent.

A child who does not qualify as a “qualifying child” may be considered a tax dependent under the definition of a “qualifying relative”.

• A qualifying relative is an individual who bears a relationship to the taxpayer described in §152(d)(2), whose gross income is less than the exemption amount (as defined in § 151(d)), who receives over one-half of his or her support from the taxpayer, and who is not a qualifying child of the taxpayer or any other taxpayer.

The qualifying child and qualifying relative rules can be found in IRS publications. Check with the IRS (http://www.irs.gov, 1-800-829-4933, TDD 1-800-829-4059).