Do I claim my child as dependent or independent

Are you having a hard time deciding whether or not to claim your adult child as a dependent on your tax return? Here’s some helpful information about claiming a dependent that can help you decide.

When it comes to filing your taxes, claiming your child as a dependent can be beneficial in many ways. According to the IRS, your adult son or daughter may qualify to be claimed as a dependent if he or she is younger than 19 at the end of the year and lived with you (the taxpayer) for more than half the year, if he or she was a student younger than 24, or if he or she is permanently and totally disabled. You cannot claim a child as a dependent if they are not a U.S. citizen, if someone else has claimed them as a dependent, or if they are filing jointly with someone else (e.g. a married adult son). 

When an adult child is considered dependant

If your child is a full-time student, you can claim them as a dependent on your tax return until they turn 24. By having a qualifying child as a dependent you could qualify for valuable credits that lower your tax liability as well as a number of refundable tax credits. If your adult child is not a student, you may still be able to claim them as a Qualifying Relative Dependent.  

When a child is considered independent

If your adult child is 19 years old at the end of a tax year, not a student, not permanently and totally disabled, and earns over $4,300 (in 2021) then they are considered independent. 

Everyone’s situation is unique, and there is no right or wrong approach when it comes to deciding to file your adult child as a dependent. It may seem confusing, but we’re here to help!

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What is Capital Gains Tax?

If you have held and sold any investments in the last fiscal year, the IRS is going to tax your profits. This is called a Capital Gains Tax. Capital gains tax is a tax on the profit from an investment that is incurred when that investment is sold. When stock shares or any other taxable assets are sold, the capital gains (or “profits”) are said to have been “realized.”

The tax doesn’t apply to unsold investments because they are unrealized, so stock shares will not incur taxes until they are sold, no matter how long the shares are held or how much they increase in value.

Long-term capital gains tax

Under current federal tax policy, the capital gains tax rate only applies to profits from the sale of assets that were held for more than a year, which are called “long-term capital gains.” The rates can be 0%, 15%, or 20%, depending on the taxpayer’s tax bracket for that year.

Short-term capital gains tax

Short-term capital gains tax, on the other hand, only applies to assets held for a year or less. These short-term capital gains are taxed as ordinary income. One thing to consider is that, for most taxpayers, the tax rate for ordinary income is often higher than the capital gains rate. As a result, it is often more profitable to hold investments for at least a year before selling.

In summary- Capital gains tax is only due after the investment has been sold, and only applies to “capital assets,” which include stocks, bonds, jewelry, coin collections, and real estate. For most taxpayers, the tax rate for long-term gains is lower than the rate for short-term gains. 

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