Let’s talk
about claiming someone as a dependent.
There are several
tax “breaks” that require you to have a dependent, for example:
·
Head
of household (HoH) filing status
·
A
dependent exemption
·
Child
credit
·
Child
care credit
·
Education
credit
·
Earned
income credit
Some of
these breaks go only so far. The head of household (HoH) filing status, for
example, can get you to zero tax, but it cannot “create” a tax refund. You have
to have tax withholdings before HoH can get you a refund; even then, you are getting
your own money back. Not so with the child credit or the earned income credit,
however. Meet all the triggers and the
EIC can refund you over $6,000, irrespective of whether you have any
withholdings or not. It is a transfer payment from the government.
So what is
required to claim someone as a tax dependent?
There are
two overall categories of dependents. The first is your own child (or
stepchild, adopted child, or descendants of the same) and is referred to as a “qualifying
child.” This is the workhorse test: think a child at home with his/her parents.
There are
five requirements for a “qualifying child”:
- Are they related to you?
- Are they under age 19 or – if a full-time student – under age 24?
- Do they live with you for more than half the year?
- Do you support them financially?
- Are you the only person claiming the child?
Any other
type of dependent is a referred to as a “qualifying relative.” The requirements
are as follows:
- Do they live with you for more than half the year?
- Do they make less than $3,950?
- Do you support them financially?
- Are you the only person claiming the child?
The term “qualifying
relative” is misleading, by the way. The person does not need to be related to
you at all. For example, a girlfriend could be my dependent – assuming that all
the other requirements were met AND my wife allowed me to have a girlfriend.
Did you
notice the age thing? A qualifying child ends at age 24 (unless we are talking
permanent disability, which is a different rule). Past age 23 and the child is
your dependent under the qualifying relative rules.
Which also
means that an income test kicks-in. That after-age-23 child would not qualify
as a dependent if he/she earned more than $3,950 for the year. This can be a
cruel surprise at tax time for parents whose kids have moved back.
That answer,
by the way, is the same for an over-18-under-24 child who does not go on to
college.
Let’s take a
little quiz on dependents. We will use the Tax Court case of James Edward Roberts v Commissioner. Here
are selected facts:
- In January, 2012 Roberts’ daughter became homeless.
- She had two young kids.
- She was pregnant with the third.
Roberts was a
decent soul, and worked out a deal with a Ms. Moody, whereby he and the two
children (very soon three) moved in with her. He agreed to pay 75% of the rent
and utilities. He also agreed to pay 100% of the meals.
Then he did
something unexpected. He wrote down the agreement, and both he and Ms. Moody
signed and dated it.
Roberts and
his (now three) grandchildren lived in the apartment from January until
October, 2012. His daughter also lived there on-and-off. When she was not
there, Ms. Moody helped take care of the kids.
When Roberts filed his 2012 tax return, he
claimed the following:
(1) Head of household
(2) Dependent exemption for three
grandchildren
(3) Child credit
(4) Earned income credit
The IRS
bounced his return, and they wound up in Tax Court.
The IRS had
an issue whether the kids were his dependents.
What do you
think?
Let’s walk through
it.
·
The
kids are related (grandchildren) to Roberts. CHECK
·
The
kids are young. CHECK
·
They
lived with him from January through October, which is more than half the year.
CHECK
·
He
paid 75% of the rent and utilities and 100% of the food. Sounds to me like that
would be over half the support for the kids. CHECK
·
The
Court tells us that their mom did not claim them. CHECK
Seems that
Roberts met all the requirements to claim the grandchildren as dependents for
2012. Why did the IRS press on this?
I don’t
know, and the Court did not explain why. I can guess, though.
I see a
person who…
·
moved
·
put
three dependents on his return who were not there the prior year
·
was
not living with the kids by the time the IRS contacted him
·
lived
in an apartment with someone who (perhaps, who knows) might have been his
girlfriend. This would raise the issue of who actually paid the expenses for
rent, utilities and food – you know, the same expenses that Roberts needed to
show that he supported the kids.
Roberts won
his day in Court.
I suspect
that written – and contemporaneously signed - agreement with Ms. Moody carried
a lot of weight with the Court.
I allow that
the IRS had cause to look at this return. After that, however, they should have
left Mr. Roberts alone. The IRS made a mistake
on this one.
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