The Internal Revenue Service has two series of tests, the qualifying child test and the qualifying relative test, to determine if you can claim someone as a dependent. If you meet all of the criteria under either test, you can usually claim your sister’s child as your dependent on your taxes. But, if both you and your sister meet the criteria, you have to go through the tiebreakers because a person can be claimed as a dependent on only one tax return.
TL;DR (Too Long; Didn't Read)
If you can claim your sister's child as a dependent on your tax return, you should be able to reap numerous tax benefits for your service.
Initial Criteria to Claim a Dependent
To claim someone as your dependent under either the qualifying child test or the qualifying relative test, you must first meet a few initial criteria. First, you can’t be claimed as a dependent by another taxpayer. If you file a joint return, your spouse also can’t be claimed as someone else’s dependent. Second, your sister’s child can’t be married and filing a joint return unless the return is filed only to reclaim taxes withheld. Third, your sister’s child must be a U.S. citizen, U.S. resident alien, U.S. national or a Canadian or Mexican resident.
Qualifying Child Tests
Under the qualifying child tests, your sister’s child must live with you for more than half of the year. If the child lives with your sister most of the year, you don’t meet the requirements to claim the child as a dependent under the qualifying child tests. In addition, the child must be under 19 years old or under 24 years old and a full-time student. Alternatively, if your sister’s child is totally and permanently disabled, there’s no age limit. Finally, the child can’t provide more than half of his or her own financial support.
Qualifying Relative Tests
If your sister’s child doesn’t meet the requirements for you to claim him or her as a qualifying child, you might still be able to claim him or her under the qualifying relative test. However, if your sister, or anyone else, could claim her child as a dependent under the qualifying child criteria, you can’t claim him or her. Even if your sister would be willing to give you permission to claim her child because it would save you more on your taxes, you’re prohibited because of IRS rules.
Assuming no one else can claim your sister’s child as a qualifying child, you can claim him or her if you meet the remaining criteria. First, you meet the residence requirement because your sister’s child is related to you, so it doesn’t matter if her child doesn’t live with you throughout the entire year. However, the child’s income can’t exceed the amount of the deduction for claiming a dependent, which is $4,050 in 2017. In addition, you must provide more than half of the child’s support during the year. That includes all living expenses, such as housing, education, medical care, clothing, travel and food.
Tiebreakers When Multiple People Qualify
If multiple people qualify to claim a person as a dependent, the IRS has several tiebreakers to determine who is entitled to claim the exemption. First, the child’s parent has priority, so if both you and your sister qualify, your sister gets to claim the exemption. If neither person is the child’s parent, the person with the higher adjusted gross income is entitled to claim the exemption. For example, if both you and another sibling qualified, the person with the higher adjusted gross income would get to claim your sister’s child as a dependent on their taxes.
Exemptions Eliminated in 2018
For the 2017 tax year, each exemption you claim reduces your taxable income by $4,050. However, beginning with the 2018 tax year, personal exemptions have been cut from the tax code. So, you won’t save any money on your taxes. As the law is currently written, exemptions will again be able to reduce your taxable income starting in the 2026 tax year.