Claiming a dependent, including one you didn't live with during the year, allows you to take a tax-saving exemption on your federal return. This exemption is essentially a deduction for a fixed amount that increases for inflation each year. And although not living with your dependent doesn't disqualify you from claiming the exemption, you will have to satisfy certain requirements. However, the law does require that you share the same household in some circumstances.
Claiming a Qualifying Child
The first of two ways you can claim a dependent is under the qualifying child rules. A qualifying child must be your natural, step, foster or adopted child, a sibling, step-sibling or a descendant of any of them.
The person you want to claim must also be younger than 19, or younger than 24 if a student, and he can't provide more than half of his own support. In addition, if your qualifying child doesn't live with you for a majority of the tax year, he may still qualify as your dependent if the reason is due to an eligible “temporary absence.”
Qualifying Children You Don't Have to Live With
If your qualifying child is considered temporarily absent under the tax law, his time away from home – even if for the entire tax year – is deemed to be time he lives with you for the purpose of claiming him as a dependent. The reason for the temporary absence must be related to his or your illness, education, business, vacation or military service.
In other words, if the reason you don't live with your dependent is because he's serving in the military and is based in another region or abroad, is away at college or suffers from an illness that requires he live in a nursing facility, for example, it's considered a temporary absence. If, however, your child performs missionary work in a foreign country for a majority of the tax year, he can't be your dependent since the reason for his absence is unrelated to any of the permitted purposes. Moreover, your own temporary absence from the home is permissible as well.
Qualifying Relatives You Don't Have to Live With
When the person you want to claim as a dependent can't be your qualifying child, earns gross income that's less than the dependent exemption amount for the year, and you're responsible for more than one-half his support requirements, he may be a qualifying relative whom you don't have to live with to claim.
Only the following relatives, however, can reside elsewhere and still be your dependent: children, stepchildren, foster children and all of their descendants; siblings, including half and stepsiblings; direct ancestors, such as your mother and grandfather; stepparents, nieces, nephews, aunts, uncles and some of your in-laws. If your dependent isn't one of these relatives, he must live with you the entire year – subject to the same temporary absence exception as under the qualifying child rules.
Dependents Living Outside the U.S.
As long as your dependent is a U.S. citizen, resident alien or national, and all other exemption requirements are met, his foreign residency is irrelevant for the purpose of claiming him on your return. For all other dependents, the IRS will disallow the exemption if they reside in any foreign country other than Canada and Mexico.