Only one taxpayer may claim the child as a qualifying child for purposes of filing as head of household. Also, a taxpayer filing as head of household must furnish over half the cost of maintaining the household. Therefore, both parents may not file as head of household. For more information, please refer to Publication 501, Exemptions, Standard Deduction, and Filing Information, for more information.

References:

• Publication 501, Exemptions, Standard Deduction, and Filing Information
• Tax Topic 353, What is your Filing Status?

In order to be your dependents, your niece and her child must meet the following tests:

1. Qualifying child or qualifying relative tests;
2. Dependent Taxpayer test;
3. Citizenship or resident test; and
4. Joint return test

References:

• Publication 501, Exemptions, Standard Deduction and Filing Information

If the child is a qualifying child of both parents, they may choose which one will claim the credit. If there are two qualifying children, each parent may claim the credit on the basis of one of the children or one parent may claim the credit on the basis of both children. If both actually claim the credit on the basis of the same child, the parent who is entitled to the credit is the parent with whom the child lived for the longer period of time during the tax year, or the parent with the higher adjusted gross income (AGI) if the child lived with each parent for the same amount of time during the year.

Refer to Publication 596, Earned Income Credit, for full discussion of the earned income credit rules.

References:

• Tax Topic 601, Earned Income Credit