Living together

[Koss]

Support test for QC

For a qualifying child, the parent is not required to provide any support at all.

The requirement is that the child must not provide more than half of his own support.

BMK

[Burke]

Reference to TTB and Pub 17 confirms you are correct. To be frank, I rarely deal with these issues. And it seems things may have changed with all this QC/QR business. But by those rules, someone who is on welfare -- state paid -- and has a $2,000 job can claim all his/her dependents, EIC, CTC, etc, etc. Doesn't seem right, does it? ( I would like to see EIC demolished.) It's not like I oppose welfare or any of the benefit programs provided low-income families. I just don't think it belongs in the tax code.

[Koss]

Earned Income Credit = Welfare

I do see your point. I haven't formed a strong opinion one way or the other.

In her 2010 report to Congress, National Taxpayer Advocate Nina Olson has a lengthy discussion that is titled:

The IRS Mission Statement Does Not Reflect the Agency’s Increasing Responsibilities for Administering Social Benefits Programs

Here's the link:

http://www.irs.gov/pub/irs-utl/2010arcmsp2_irsmission.pdf

She argues that it is not only EIC that has transformed the IRS into a social benefits agency, but also the stimulus payments, the Making Work Pay Credit, the Homebuyer Credit, and the massive baggage that comes with health care reform.

From a purely philosophical and economic perspective, taxation and social benefits are inseparable. They are two sides of the same coin. Our government collects taxes from the haves, and doles out benefits to the have-nots. It is redistribution of wealth, plain and simple.

Whether the two functions should be handled by the same agency, and whether social benefits should be paid through the filing of tax returns is a different set of questions.

I have sometimes tried to explain to clients that EIC is not really a refund, but rather an outright payment from the federal government. How, I ask them, can you get a refund of $3000 when you only had $800 in federal tax taken out of your paychecks?

Sometimes they get it; sometimes they don't. I usually use this explanation when I'm dealing with someone who only worked for a couple of weeks, brings me a W-2 with wages of $449.00, and then wants to know why they're not getting the same $5000 "refund" that they got last year, especially since they now have three kids instead of two...

BMK

[Burke]

I
From a purely philosophical and economic perspective, taxation and social benefits are inseparable. They are two sides of the same coin. Our government collects taxes from the haves, and doles out benefits to the have-nots. It is redistribution of wealth, plain and simple.

Whether the two functions should be handled by the same agency, and whether social benefits should be paid through the filing of tax returns is a different set of questions.
IBMK

And that is my argument. I do not believe that these two functions should be handled by the same agency. Collecting federal income taxes is the responsibility of Congress. The handling of social welfare programs is the province of the individual states. And those agencies are appointed with the responsibility of means-testing.

The income tax return only shows income. It does not report wealth.

[WhiteOleander]

No post has seemed to address the issue of support, which is one of the qualifications of claiming a dependent. Does the wife, with $16,500 gross income, actually pay more than 1/2 of any child's support? I am thinking that requirement is what IRC 152(c)(4)(b) addresses -- which is why it refers to higher AGI. And for the child to be "qualifying" doesn't the support issue come into consideration?

Actually, for a qualifying child, the law states that the child cannot provide more than half of their own support. It does not say that the parent must supply more than half of the support. If it is refering to a qualifying relative, the the taxpayer must supply more than half the support.

[Koss]

Income vs. Wealth

Burke wrote:

The income tax return only shows income. It does not report wealth.

Well, yeah, but if you have more than $3100 in investment income, that disqualifies from you the Earned Income Credit. So Congress has attempted to put some limits in place. That restriction is an attempt to measure wealth.

I'm just playing devil's advocate at this point. I said earlier I don't really have a strong opinion on this.

Theoretically, you're right, of course. Someone who won the lottery could have a million dollars in a non-interest bearing checking account, and if the other variables fit, they could still qualify for EIC.

BMK

[Burke]

Or in non-income producing assets, like real property, cars, art, gun collections, antiques, you name it.

[Gary2]

But that sentence falls within the scope of the preceding sentence, which says "More than 1 parent claiming qualifying child." Technically, that's not even a complete sentence. But to me, the meaning is clear. The second sentence is only applicable when there is "more than 1 parent claiming [the same] qualifying child."

The Cornell law site shows that leading verbiage, "More than 1 parent ...", as a header, not part of the text. While it's common for laws to say that the headers are simply for layout and not part of the law, in this case I agree, the meaning is clear, especially when you look at the entire section - or at the IRS examples.

Which brings me to a point about the new AGI rules, which are documented with the tiebreaker rules, but unlike the others, apply regardless of whether more than one taxpayer actually claims a given dependent:

There are two parts to the AGI rules:

1. In order for someone who is not the parent to claim a qualifying child, that person must have a higher AGI than any of the parents. It doesn't matter if the parent chooses not to claim the child.

2. If no parent is eligible to claim the child as a qualifying child (e.g. the child didn't live with parents), then only the qualifying person with the highest AGI may claim the child.

So in the first case, if you have grandparent, parent, and two children living together, and the grandparent's AGI is more than the parent's, then the parent can allow the grandparent to claim one or both children. But if the parent's AGI is more than the grandparents, the grandparent cannot claim the child, even if that's what the parent wants.

In the second case, if you have grandparent, aunt, and two nephews living together, then whichever of the grandparent or aunt has the higher AGI is the only one who can claim the nephews. They can't be split, and there is no choice (other than not claiming them at all).

[Gary2]

Reference to TTB and Pub 17 confirms you are correct. To be frank, I rarely deal with these issues. And it seems things may have changed with all this QC/QR business. But by those rules, someone who is on welfare -- state paid -- and has a $2,000 job can claim all his/her dependents, EIC, CTC, etc, etc. Doesn't seem right, does it? ( I would like to see EIC demolished.) It's not like I oppose welfare or any of the benefit programs provided low-income families. I just don't think it belongs in the tax code.

The whole point of the EIC is to encourage people on welfare to work. If you say that they have to work enough to be able to support their own kids, then (even in a good economy) it's likely to fail as an incentive to get them to work.

With only $2000, there won't be any CTC unless there are three or more children.