Determining who can claim a child as a dependent isn’t always straightforward, particularly when parents are unmarried, separated or divorced. The IRS provides rules that define the custodial parent and outline how tax benefits are allocated. However, real-life situations often introduce complexities that can lead to confusion. Tie-breaker rules are designed to resolve disputes, but mistakes can result in rejected returns or trigger audits.

We’re here to break down these complexities and present diverse case studies that will help you navigate dependency claims in a variety of scenarios.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their corresponding answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: What is the definition of “totally and permanently disabled” for federal tax purposes?

A: For federal tax purposes, an individual is considered totally and permanently disabled if they cannot engage in any substantial gainful activity due to a physical or mental impairment, and a physician certifies that the impairment:

• Has lasted or is expected to last at least 12 continuous months, or
• Is expected to result in death

This definition, from §22(e)(3), applies to various tax provisions, including the Credit for the Elderly or Disabled (§22) and determining dependency status for a disabled child under §152(c)(3).

Note: While “substantial gainful activity” isn’t specifically defined in the Code, it generally follows SSA and Treasury guidance – meaning the ability to perform significant work for pay. While Social Security disability determinations (SSDI/SSI) may support a taxpayer’s claim, they are not determinative and are evaluated alongside all available medical evidence.

Q: Does the gross income test amount ($5,050) include Social Security benefits if they are not taxable to the individual?

A: No, nontaxable Social Security benefits are not included in the gross income test.

For 2024, the gross income threshold is $5,050 (Rev. Proc. 2023-34), and for 2025, it increases to $5,200 (Rev. Proc. 2024-40). The gross income test disregards tax-exempt income – such as certain scholarships, the nontaxable portion of Social Security benefits and specific earnings by disabled individuals from sheltered workshops [§152(d)(4)].

However, while nontaxable income (e.g., nontaxable Social Security benefits) is excluded from the gross income test, it is considered when determining whether the individual provided more than one-half of their own support, if that income was actually used for their support [Reg. §1.152-1(a)(2); Rev. Rul. 71-468].

Q: Does a disabled adult child qualify for the $2,000 child tax credit (CTC)?

A: No, a disabled adult child does not qualify for the $2,000 CTC. Under §24(c)(1), a “qualifying child” for purposes of the CTC must:

• Be under age 17 at the end of the tax year
• Be a dependent of the taxpayer
• Be a U.S. citizen, national, or resident alien
• Have lived with the taxpayer for more than half the year

Even if the child is permanently and totally disabled, once they reach age 17, they are no longer eligible for the child tax credit. However, you may be able to claim the $500 credit for other dependents under §24(h)(4) if the adult disabled child qualifies as a dependent under §152. This credit is available for qualifying relatives and other dependents who don’t meet the age requirement for the CTC.

Q: What happens when a judge, in a divorce decree, states that each parent can claim the child in alternating years?

A: Regardless of any provisions in a divorce decree, the dependency exemption is governed by federal tax law, not state court orders. For post-2008 agreements, a properly executed Form 8332 (or a conforming written declaration per Treas. Reg. §1.152-4(e)) is required for the noncustodial parent to claim the child. This release must be attached to the noncustodial parent’s return for any year the dependency claim is being transferred.

Importantly, language in a divorce decree or separation agreement is not sufficient on its own unless it was executed before 2009 and meets the prior rules. For post-2008 agreements, only a properly executed Form 8332 (or conforming statement) satisfies the IRS requirement. Failure to obtain and attach the signed release will generally result in the IRS denying the noncustodial parent’s claim, regardless of what the court order says.

To learn more about qualifying dependent case studies, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.

Question: Ron is a sole proprietor. Ron sold his accounting practice in 2025. The sale included office equipment, client files and goodwill self-created by the business based on Ron’s strong customer relationships with his current clients. In the sales agreement, Ron received $150,000 specifically allocated to goodwill. Ron wants to know if this amount qualifies for long-term capital gain treatment on his tax return. Is the gain on the sale of self-created goodwill considered a capital gain?

Answer: Yes. Under §1245, amortizable §197 intangibles (like purchased goodwill, customer lists, trademarks etc.) are classified as §1245 property. This means they are subject to potential depreciation recapture. Any gain on the sale or disposition of the property may be recharacterized as ordinary income to the extent of prior amortization deductions.

However, self-created goodwill and going concern value typically do not trigger §1245 recapture. Instead, the gain from selling these intangibles is generally treated as capital gain if held for over a year. This treatment is supported by §197(c)(2), which provides the exclusion of self-created intangibles as amortizable §197 intangibles and §197(f)(1), which denies depreciation recapture on goodwill and going concern value that was not acquired in a taxable transaction.

Since Ron self-created the goodwill as part of his trade or business and sold it as part of the overall sale, the gain is reported as a §1221 gain, which is taxed as a long-term capital gain.

While people are often terrified that a simple mistake on their annual federal income tax return will result in an IRS audit, the truth is that minor errors are not uncommon and often easily rectified. In some situations, the IRS would prefer that you don’t file an amended return because the agency will correct minor math errors and either request that the taxpayer pay additional tax or refund an overpayment. However, knowing which situations require an amended return can often trip up taxpayers.

To help taxpayers who believe they may need to file an amended return, we are providing answers to some common questions.

What is an amended return?

An amended tax return is simply a form(s) filed by a taxpayer to correct errors made on a tax return. Most individual taxpayers will use Form 1040-X, Amended U.S. Individual Income Tax Return, to file an amended return.

Form 1040-X can be filed electronically or on paper, but the electronic option is only available for the current tax year and the prior two tax periods. Corrections to older returns must be paper filed. If the amended return corrects a paper-filed return from the current processing year, the amended return must also be paper-filed.

A taxpayer may e-file up to three amended returns per tax year, but any additional returns filed by the taxpayer will be rejected after the third return is accepted.

When should you file an amended return?

An amended return is usually filed to correct errors with the following information provided on the initial return:

• Amount of tax owed
• Reported income
• Number of dependents
• Filing status
• Claimed tax credits or deductions
• Certain claimed deductions affected by legislative changes

An amended return is also used to claim tax relief if the taxpayer was affected by a federally declared natural disaster that changes their tax liability. This is sometimes necessary when the victims of natural disasters must file their federal returns before action is taken to provide them with tax relief.

The IRS also offers a free online tool to help taxpayers determine whether to file an amended return.

When should you not amend?

In most cases, an amended return is not required when the taxpayer discovers a math or clerical error on a recently filed return. The IRS usually finds these errors while processing the return and will send you a bill for any underpayments it uncovers. If the agency determines that you overpaid your taxes due to the error, it will refund the overpayment amount.

How long do you have to amend?

If the amended return will result in a tax refund, the taxpayer must file their Form 1040-X within either three years from the original filing deadline or two years of paying the tax due for that year, whichever is later. Extensions are not included when determining the date the return was due. Still, if the statutory due date falls on a Saturday, Sunday or legal holiday, it must be filed on the first day that is not a weekend or holiday.

For taxpayers not seeking a tax refund, there is no time limit for filing an amended return to correct a previously filed return.

What if I owe the IRS money?

If the amended return shows the taxpayer underpaid their tax due for the year at issue, taxpayers who e-file their Forms 1040-X can make a payment using IRS Direct Pay. Taxpayers who cannot pay the full amount may request a payment plan/installment agreement. A check should be included with the Form 1040-X if paper-filing the form.

Do not make any payments for any interest or penalties you may also owe. The IRS will calculate those amounts and make any needed adjustments.

Should you discover you made a mistake on a previously filed return, a tax preparer can often help. A qualified tax professional understands the rules and regulations that apply to amended returns and can guide you through the process to ensure the amended return is correct and help limit the penalties and interest that may be accruing on any taxes you underpaid in previous tax years.

If you are a tax professional and looking for more information on amended returns, check out our on-demand webinar on filing amended returns for individual taxpayers that will be available beginning in May.