HOH – NON DEPENDENT ? or Not

[TAXNJ]

How to handle when explaining to a client whether the client can file as HOH and claim the “qualifying child” as a “non-dependent”?

Scenario:
-Taxpayer is divorced (does not live with ex-spouse) and has a child. The child is a 20 year-old full time student.

-Child spends time with Taxpayer and with Taxpayer’s ex-spouse. Of course, the Taxpayer says the child spends equal time with both. Taxpayer receives letter from ex-spouse stating the amounts paid (separated as “child support” and “alimony”) by the ex-spouse to the Taxpayer.

-Taxpayer works full time.

-Taxpayer says ex-spouse claims their child as a “dependent”

Thanks in advance

[Koss]

Custodial Parent

Your client has the right idea, but the wrong fact pattern...

It sounds like someone gave her ex pretty good advice, or your client is trying to adhere to an agreement stated in the divorce decree. If the ex is paying child support and alimony, then the divorce court probably considers your client to be the custodial parent.

And the basic rules have not changed in many years. If your client is the custodial parent, she can allow her ex--the noncustodial parent--to take the dependent exemption, while she still gets to take the child as a qualifying child for EIC and Head and Household (and theoretically for the Child Care Credit as well, but not for a 20-year old).

The problem is that the IRS doesn't care whether the divorce court considers your client to be the custodial parent. The IRS uses its own criteria, that is rooted in federal tax law--not state law. Under federal tax law, the custodial parent is that parent with whom the child lived for more than half the year.

Once you determine which parent is the custodial parent, the rules are very simple: The custodial parent gets all the benefits, unless s/he chooses to relinquish the dependent exemption and the Child Tax Credit to the noncustodial parent by signing Form 8332.

These rules are applicable regardless of what the divorce decree says. It's really that simple.

Until you discover that your client can't figure out who the custodial parent is.

They'll tell you that "we have shared parenting." Or "we have shared custody." Or something similar. In your post, you said that your client claims that the child spends equal time with each parent.

That means for 2008, which was a leap year, that the child spent 183 days with each parent. Therefore, the child did not live with either parent for more that six months. Therefore, neither parent gets any of the tax benefits.

The problem is that your clients are trying to give you a fact pattern that conforms to what is written in the divorce decree. What is written in the divorce decree is a fantasy that was dreamed up by attorneys, and then signed by a judge. It has no connection to the real world.

Under federal tax law, you determine who the custodial parent is by determining who the child actually lived with. And you simply ignore the divorce decree.

Never confuse a divorce decree with reality.

Once you explain this to your client, she may have an epiphany of sorts. She might suddenly discover that the detailed notes in her calendar in MS Outlook on her PC reveal that the child actually lived with her for a little bit more than six months last year...

That line in bold type is a paraphrase from the title of a Dilbert collection:

Never Confuse a Memo with Reality.

BMK

[Koss]

Further thoughts...

What exactly does custodial parent mean for a "child" that is 20 years old?

This is another reason why the divorce decree is meaningless.

Under state law, I don't think anyone can have "custody" of a person who is 18 years of age or older, unless the person has been declared mentally incompetent.

But some divorce decrees require the payment of child support even after age 18, if the child is a full-time student. This concept, of course, dovetails nicely with the federal tax law, which allows the child to be a qualifying child until age 24 if he is a full-time student.

I stand by my original statement that your client can claim HoH and EIC if the "child" lived with her for more than six months of the year. And if he's "away at school," that would be construed as a temporary absence from home, meaning that even while he is away at school, his principal abode is still... well, wait a minute, now... who was he living with right before he "went away to school?"

As you can see, this can take you down a rabbit hole.

Ultimately, I think some of these questions may be litigated in District Court or in Tax Court, because there is an arcane issue that arises in connection with the Kiddie Tax that hinges on the very same question of which parent is considered the custodial parent.

Someone's going to think I'm really nuts, but this whole issue ties directly into the laws that govern employee benefit plans.

I'm not kidding. It's not a coincidence your kid can be covered under your employer's group health insurance plan until he turns 19, which is usually the year they graduate from high school, but you can also continue the coverage if they go to college full-time... until age 24. The requirements for covering a child under an employee benefit plan are theoretically the same as the requirements for a qualifying child.

But the rules were a bit different before UDC...

Volumes have been written about the effects of UDC on employee benefit plans that allow coverage for same-sex partners, and for the children of same-sex partners... The unintended consequences are quite interesting...


BMK

[TAXNJ]

Thanks

[QUOTE=Koss;76358]Your client has the right idea, but the wrong fact pattern...



And the basic rules have not changed in many years. If your client is the custodial parent, she can allow her ex--the noncustodial parent--to take the dependent exemption, while she still gets to take the child as a qualifying child for EIC and Head and Household (and theoretically for the Child Care Credit and the Child Tax Credit as well, but not for a 20-year old).

The problem is that the IRS doesn't care whether the divorce court considers your client to be the custodial parent. The IRS uses its own criteria, that is rooted in federal tax law--not state law. Under federal tax law, the custodial parent is that parent with whom the child lived for more than half the year.

Once you determine which parent is the custodial parent, the rules are very simple: The custodial parent gets all the benefits, unless s/he chooses to relinquish the dependent exemption and the Child Tax Credit to the noncustodial parent by signing Form 8332.

Thanks for your comments

I think you said it well in the first three paragraphs

Bottom line - one can file as HOH and claim the non dependent if child lives with taxpayer for more than half the year and ex spouse gets the dependent deduction if form 8332 is given to the ex spouse. Both would be happy.

[Davc]

[QUOTE=SAMMY;76371]

Both would be happy.

Speaking of fantasies......