The Internal Revenue Code sets forth a list of requirements that you must satisfy to claim a child as your dependent. None of these conditions automatically makes you ineligible to claim her just because she receives Social Security survivors benefits. Nonetheless, it's beneficial to evaluate your eligibility to claim the child's exemption. And depending on your relationship with the child, it might be your responsibility to assess whether her survivors benefits are taxable.
Depending on several factors, you are able to claim a child on your taxes if she is receiving Social Security survivors benefits. However, the IRS has very specific rules regarding claiming dependents.
Required Relationship Parameters
A certain relationship must exist between a taxpayer and the child he wants to receive certain tax allowances for a dependent. The tax rules require the dependent to be your own child or one of your child's descendants, such as a grandchild or great-grandchild, or a sibling or any of a sibling's descendants, such as your niece or nephew. Note that stepchildren, foster children and adopted children are treated the same as your natural-born children. Moreover, half-siblings and step-siblings are included in the definition of sibling.
Maximum Age & Residency
Once children reach a certain age, your ability to claim them as dependents is governed under the rules that cover adults. As long as your child is younger than 19 on the last day of the tax year, or younger than 24 if a student, her age doesn't prevent you from claiming her as a dependent. If she's totally and permanently disabled at anytime during the tax year, her age is irrelevant. She must live with your for more than half of the tax year for which you claim a dependency exemption
Child's Financial Support
The only time a child's receipt of Social Security survivors benefits can affect your ability to claim her as a dependent is if she uses those funds for her own support. The tax code precludes you from claiming any child who provides more than half of her own support. Support covers expenses for housing, including utilities, clothing, transportation, the cost of enrolling in school, and medical and dental treatments, for example.
The key factor is whether or not the child actually uses the survivors benefits to pay for these items. In other words, if most of her survivors benefits are kept in a savings account or spent on nonessential items, you don't count those funds as contributing to her support. Moreover, it isn't necessary for you to support her financially – you still qualify even if someone else pays most of these expenses.
Taxable Survivors Benefits
Despite being dependents, children who receive income need to make W4 allowances and might have an obligation to file tax returns. And if they're too young to file on their own, it's generally the responsibility of parents and guardians to get the returns filed. Social Security benefits aren't typically taxable if those benefits are the only type of income received.
Dependents who earn income from a part-time job, or who have unearned income such as dividends or interest from investments, might be required to file a return. Depending on the child's total income, some, but not all, of her survivors benefits might be taxable.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.