Income Question

[S T]

A retired taxpayer has a handicapped/disabled person living in her home.

Taxpayer is Not charging rent, however, the family of this disabled person is so grateful, that they are paying the Taxpayer $ 400 per month to cover the cost of additional groceries and maybe utilitiy costs.

Since groceries are not necessarily a deductible tax item for this taxpayer, is there a requirement to report the $ 400 per month?

Sandy

[erchess]

Assumptions

I imagine that the disabled person is getting at least half use of the property (as opposed to being involuntarily limited to one or two rooms and eating less good food than the home owner) that the home owner is spending much more than 400 a month of his or her own money on the place and that if the IRS needed proof of all this it could be easily provided. I am sure that payments one receives from relatives of a houseguest for one's expenses do not have to be reported unless one is making a profit. However it might be easier in the long run to go on and report the activity as a hobby. Part of it would have to depend on how anxious the taxpayer would be if they did get audited over this.

[Corduroy Frog]

No Reporting?

Report as a hobby and you'll have extra tax liability. How could such a thing be a "hobby" anyway? The only element which may bear a hobby would be lack of a profit motive. But this is not an "operation." Sorry Erchess.

I believe the receipt of money bears no relationship to motive, otherwise people would be claiming "I didn't ask for money" as an excuse for not reporting.

What I don't know, however, is whether the payment might be reportable as "rent", or as "care." If it is "care", and the amount received does not cover expenses (as well as allocated household expenses) it might not be reportable at all. When allocated expenses are taken into account, I might be far-stretched to imagine $400/mo would result in a profit.

[erchess]

Cordfrog

I strongly disagree with your statement that intent is irrelevant. I believe that from a tax perspective the definition of a hobby is "absolutely any activity which is not engaged in with a provable profit motive but still generates income". I do agree with you that if the relatives were giving him more than he could prove he was spending then he would have profit and would be deemed to have profit motive, thus making the profit taxable. He would need to use Sch C or E depending on whether the money was for rent or for care.

I still think it's probable that the taxpayer spends considerably more on the handicapped individual than he is receiving for the individual's care. I still say that in such a case the taxpayer has two choices. He can let the income go unreported and stand ready for an audit that will ask him to explain why he did not report the income. That's what I'd do but being audited will not make me lose sleep. If being audited on this issue would make him lose sleep he can report the income as hobby income and the expenses up to income on Sch A as misc itemized deductions subject to the 2% of agi haircut. He will therefore report 2% of what is received as income taxed at his top marginal rate but many people would rather do that than worry about an audit. On the other hand, reporting loss on Sch E or C and deducting same from other income would eventually be disallowed because the IRS would say there was a clear lack of profit motive, and they'd be right.

[Lion]

Expense?

If this were a friend/roommate who's sharing expenses by kicking in about $400 a month on a semi-regular schedule and paying extra when operating expenses are higher (food for a party, A/C in the summer, snow plowing in a stormier than usual winter), then I'd say they're sharing living expenses and not reportable. But, this sounds like a person who could not live on their own, whose relatives are not willing or able to care for him and are paying a very regular $400/month to have their relative cared for. You and your client will have to explore the details, facts & circumstances, to see if this is services or maybe rental or what it is.

Would your client keep their boarder if the payments dried up? How was the boarder cared for before they arrived (home health care workers, for instance)? Would your client do this for a second boarder who paid if he has another bedroom?

[oceanlovin'ea]

Helping out

I read Sandy's post a couple of times to make sure I was getting the picture that she meant.

I think this person saw someone in need and was doing the kind thing to give them a place to stay. It might have been a situation of this person either being on the street and homeless or her giving them a place to stay.It sounds like she did this and received the gratitude from the family of this person.
They were so relieved that they offered to give her some money each month to help with the expenses knowing this person is retired and on a fixed income.
I don't think this is a tax matter. I think this is human kindness and something that a lot of us may be called on to do in the future. Families are being made homeless because of being out of work and losing their homes. I know a family of 4 that had their own home and lost it, stayed in a friends home while they were out of state for several months and then with her mother for some more time and have just now got a place of their own again. I'm sure they contributed whatever they could to expenses. But none of the ones that helped them should be required to report that money.

I am a stickler for doing things right and reporting things correctly, but I wouldn't report this as income.

Linda, EA

[solomon]

oceanlovin hit the nail on the head.

[Gretel]

I would consider this a gift and since it is under $13,000/year, no reporting requirements.

T/P gifts his resources and time and gets a gift back.

[ToledoEd]

You would need to be very careful calling this a business situation, or even a rental, as I am certain that the recipient is not a licensed care giver, and the housing may not meet the standard of care requiements for a handicapped care facility. I would agree with oceanlovin'ea that this is an act of compassion, and the money given by family is not a tax situation. There is no profit expectation and no intnet to be in business. It is a bit of a slippery slope, but I would have no qualms about not reporting this on the recipients return. If pushed I would argue that the money is given to the handicapped person and they are spending it on their own living expenses. I also would not claim the handicapped person as a dependent on the retiree's return, with the facts as given.

[DaveO]

Very nice summation ToledoEd. My concerns were with the whole legal/license issue and I agree with Oceanlovin'EA as far as it being a gift as well.

[erchess]

Gift

I agree it is probably a gift situation. My bad for failing to use the word gift in earlier posts. I still think there is the risk of it being questioned but oh well. I think we will win. I also think that if audits scare the person it could be reported as taxable without getting anyone in trouble.

[S T]

Compassion

Thanks everyone for posting. Thanks to those of you that tried to read between the lines. I really didn't want to post to much to "cloud" the issue.

The disabled person had been living with a sister (friend of the taxpayer), the sister died of cancer and there was no immediate family in the area for him to go live with, so could have meant ??? Taxpayer offered him to live at her home, and the disabled person's family that resides out of the area was so thankful that they are contributing the $400 per month.

T/p offered the person to come live with her, not expecting any funds, just based on her relationship with the deceased sister of the disabled perons. T/p is not a licensed caregiver and there have not been any modifications to the home. T/p will not be claiming the disabled person as a dependent.

As ToledoEd post stated could be a "slippery slope" and I discussed pitfalls with the T/P - for 2010 it was only for about 2-3 months, and to be continued into 2011.

My thought is with some of you that posted, the T/P has a huge heart, and compassion and is offering some asssitance to someone in need. There is, as far as I can tell, no profit motive.

So once again thank you to everyone standing around the "virtual water cooler" to discuss this issue.

Sandy

[oceanlovin'ea]

you're welcome

You're welcome, Sandy.

That is what we are all here for....we all need that extra brain power at times.

I think this year I'm going to need it a lot.....from the way things are starting out.

Linda

[S T]

Watching

Yes, Linda,
I think we are all going to need some extra effort this year in sorting through the Taxpayer details and scenarios. Already too many for me, but you have really have had a "handful" based on your posts

So we should expand the "Virtual Water Cooler" I think we possibly could all be in need!

Thanks for your thoughts and wisdom! And I am so glad that all are frequenting the Forum at TMI to lend their thoughts and other expertise.

Take Care,

Sandy