When is the perfect time to give birth to a child during a tax year so as to claim that child as dependent on your tax return? You might be amazed by the answer: but anytime during the tax year, including December 31. It is possible to claim your newborn baby as a dependent, as long as it was born at any time during the fiscal year, even if it is 11.59 p.m. on December 31.
You might not be lucky to claim your child as a dependent if the baby is born around 12:01 a.m. on January 1 – at least until you complete and file that year's tax return. Yes, your baby must be born to be eligible to claim as a dependent. You cannot claim an unborn child.
There is a persistent rumor that a baby must be at least six months old to claim him/her as a dependent. This is not true, but many other rules apply.
The residency rule for a qualifying child
The first rule of claiming a qualified child as a dependent is that the child must live with you for more than six months. This rule may seem to rule out your baby born on New Year's Eve, but the IRS code makes an exception for newborns.
Also, the exception applies when a child dies during the year. During the year, babies who are given birth to or dead are considered to have lived with you for at least six months if your home has been their home all their life.
This rule also applies if the baby has lived with you all year round, except for necessary hospitalizations after birth.
Your baby will take the residency test because he/she has probably lived with you since they were born. Hospitalization is also considered living at home.
The situation varies if the child is placed in foster care or put up for adoption and leaves your custody. Another exception would be if the other parent immediately takes custody of the child and brings it home, and you don't even live with that parent. In this case, an additional set of rules apply.
Tiebreaker Rules
The IRS provides detailed criteria for who can apply for a dependent child when parents are divorced or separated. These are called "tie breaker rules" because they often come into play when both parents want to claim the child as a dependent. The rule of the Internal Revenue Code is that only one parent can do this.
These rules are like a ladder. Parents must proceed step by step until one qualifies.
The first step is that the parent with whom the child has lived the most during the fiscal year can claim the dependent. If a child is born in November and leaves the hospital immediately with the other parent, that parent can claim that the child has lived with them for as long as they have lived.
What if it is a gray area? What if your baby was born late on New Year's Eve? As such, it can't be decided who the baby has lived with the most? The parent with the highest AGI (adjusted gross income) has the right to claim the dependent child in this case. It all depends on which of the parents earns the most.
Of course, all of these rules assume that you are not married. Both can effectively claim the child, no matter when the baby was given birth during the fiscal year if you are married, and filing a joint return.
Other tests
Your baby will also be considered your dependent by default according to the remaining IRS rules for a qualified child:
A dependent must be your daughter or son, sister or brother, or a descendant of one of these persons. You've got it covered if you've just given birth.
The child must be less than nineteen years old on the last day of the tax year or 24 years old if he is a full-time student. Your newborn also qualifies here.
Finally, the child must not have provided more than half of his financial support during the year.
Is it still important in 2021?
You may have heard that having a dependent child does not count for much anymore, at least from 2018 to 2025, due to tax legislation passed by Congress in December 2017. The Tax Cuts Act and Jobs Acts (TCJA), which entered into force in 2018, eliminated the personal exemption offered to each of your dependents, at least until 2025, when the law could expire
But the EITC (earned income tax credit), the child and dependent care credit, and the child tax credit are still in effect, and having a dependent is essential to qualify for each.
You may qualify for an earned income tax credit without qualifying children, but your credit amount will be significantly less than you could claim with one or more children, except in 2021. The American Rescue Plan Act 2021 increases the maximum amount of the EITC for workers without dependents to around $1,500 in 2021 just in response to the coronavirus pandemic
Your dependent can also help you qualify as a HOH (Head of household). This is an advantageous filing status if you and your child's other parent are single and live together.
So yes, having a dependent is always a good thing at the time of taxation, and yes, your newborn will qualify you if you follow these rules, even if your baby is born at the 11th hour of the last day of the year.
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