Dependent Support

[Gary2]

While mathematically a person's support from others could be negative (perhaps if a lot of money is spent supporting others instead), more likely, you have left out some savings or true support items.

Some would argue that he still has the value of his parents' home since school is a temporary absense, although he could not take advantage of food or other amenities there. In your situation, I suspect that he is not able to be claimed as a dependent by anyone since he paid for college and other items with $17,000 from his own funds. Unless the parents or others provided him with a nice car or some other large support amount, I do not see how this would be a Qualifying Child of anyone.

The base note said he was still living at home. I interpreted that as not living in a dorm or apartment at school. Depending on location, room & board at home could be very significant. Also, don't forget health insurance (if he's on the parents' policy).

[dtlee]

The tricky one is scholarships. They're not part of support when considering whether or not parents may claim the child, but they are part of the support when asking the question for anyone else, e.g. grandparents claiming the child.

True and a very important point.

One of the things I tell preparers is that they need to evaluate dependent candidates very differently than under the old rules.

Under the old rules, we looked at the parents and tried to determine if the child was a qualifying child of the parents.

Now, we look at the candidate and need to consider all the other members of the household who might have the right relationship to that candidate. In an update class a few years ago, I presented a simple question like this and asked if the student was a qualifying child. Everyone agreed that he wasn't. In actuality, since much of the support came from scholarships (despite what is in Publication 501 since it contradicts the code and was never fixed when the rules changed in 2005), the student was a qualifying child of his older sister who just happened to be still living with their parents.

[Gary2]

(despite what is in Publication 501 since it contradicts the code

I think I understand and agree with everything you wrote except for this part. To which text in Pub. 501 are you referring? I usually find the problem is that where it says "Scholarships received by your child,", many people mistakenly generalize it to "received by your potential dependent", when it's literally "your child, not your grandchild, niece, etc." I'm not even sure, off the top of my head, whether foster child is included.

[dtlee]

I think I understand and agree with everything you wrote except for this part. To which text in Pub. 501 are you referring? I usually find the problem is that where it says "Scholarships received by your child,", many people mistakenly generalize it to "received by your potential dependent", when it's literally "your child, not your grandchild, niece, etc." I'm not even sure, off the top of my head, whether foster child is included.

In rereading, you are correct.

It does say "Your child."

I stand corrected. Pub 501 is accurate.

[geekgirldany]

I did enter some numbers wrong to get negative amount. Son did provide over 50% of his support. Amount contributed by Dependent for support = $12,000. 50% of Expenses for the Person You Support = $8,000.

When asking my client for the information his comeback is that the son does not pay any of the household expenses so this should not be included as "dependent's share of home expenses" as calculated on the worksheet.

I am use to children still in college not making but $3,000 to $8,000 in wages.

[dtlee]

When asking my client for the information his comeback is that the son does not pay any of the household expenses so this should not be included as "dependent's share of home expenses" as calculated on the worksheet.

Around here, the fair market value of the home, utilties, cable, etc can amount to quite a bit of support from the parents. If the taxpayer is providing the home for a child and not wanting to consider it support of the child, that is really not his prerogative. The dependent candidate's share of home expenses paid by anyone (regardless of whom) is part of the dependent's support.

There are two questions being asked:

1. How much did this person supply?
2. What does it take to support this person?

The dependent's share of home expenses is part of question number 2. If #1 (the support the son provided) is not more than half of #2 (the total support needed), he cannot claim himself.

If the parent is providing a household and not providing the figures, you have no proof that the dependent is supporting himself. I would make sure that you get at least an approximation.

[Gary2]

I did enter some numbers wrong to get negative amount. Son did provide over 50% of his support. Amount contributed by Dependent for support = $12,000. 50% of Expenses for the Person You Support = $8,000.

Not that it matters given the conclusion, but : He had $17K in available funds, only spent $12K on himself. What did he do with the remaining $5K, besides taxes?

When asking my client for the information his comeback is that the son does not pay any of the household expenses so this should not be included as "dependent's share of home expenses" as calculated on the worksheet.

Did you explain that it doesn't mean the amount his son paid, it means the value that anybody is paying to help support the son?

[geekgirldany]

Renewing this post... I can not get the client to understand why he can not claim his son. He said there is no way his son is paying 50% or more support. I then asked him if he was saving some of his money and he said no.

I would really appreciate some of you all looking at the attached support worksheet. Am I missing something? I feel like I am not explaining it to him right.

Thank you

[Gary2]

Some miscellaneous points and questions:

Add the son's student loans to his total available (under 1.i, Loans taken). This will increase the amount of support from the son.

$2.4K seems very high for homeowner's insurance, but usually this is an easy number to get reliably. That suggests the home is high value, which leads to the question of whether you've underestimated the fair rent? (Not that I expect that to be enough to change things.)

Now for the big omissions: The son never eats outside the house? Didn't buy any clothing? Spent $1,440 on gas but doesn't have insurance on his vehicle, and didn't change the oil or have other expenses? Never goes to movies or other events? Isn't covered by health insurance (probably paid for by parents)? Didn't go anywhere for spring break?

The son had about $17K available, including the student loan, but you're showing $15.2K in expenses, including the non-support items. What happened to the other $1.8K?

What's the parents' income range?

Here's the question for the parents: The son contributed about $16K to his own support, including his loan, but not including about $1K he spent on taxes. Can the parents show that they spent $16K on him? If so, where?

[geekgirldany]

Thanks so much Gary for taking a look at it.

Added the student loan to Dependent's Contributions. Thank you for catching that.

The Homeowners Insurance... that actually is insurance and real estate taxes. I have filled out two other kinds of worksheets trying to verify my figures. They had real estate taxes in there so I added it there.

"Now for the big omissions: The son never eats outside the house? Didn't buy any clothing? Spent $1,440 on gas but doesn't have insurance on his vehicle, and didn't change the oil or have other expenses? Never goes to movies or other events? Isn't covered by health insurance (probably paid for by parents)? Didn't go anywhere for spring break?"

I asked those questions. He did not answer on entertainment. No health insurance coverage. Looking back at emails he said he is not responsible for food, his clothing, or car insurance.

"The son had about $17K available, including the student loan, but you're showing $15.2K in expenses, including the non-support items. What happened to the other $1.8K?"

I asked if son had a savings account... no. No other information provided.

"What's the parents' income range?"
$40,000

"Here's the question for the parents: The son contributed about $16K to his own support, including his loan, but not including about $1K he spent on taxes. Can the parents show that they spent $16K on him? If so, where?"

Excellent questions that I will ask. He made sure to tell me that (as I stated before) that the dependent does not contribute at all to the household expenses including food and what they provide outweighs what he makes.

I did email the client the worksheet so he can look at the numbers while I talk on the phone to him tomorrow.

Thank you for the help Gary. I really do appreciate it.

[S T]

Worksheets

Dany,
I have CFS Tax Tools and used those worksheets with the figures you posted - the support and dependency worksheets

And it simply appears that the Son made too much money between Wages, UI and Student Loan - and the parent's expenses are not enough to arrive at the greater of 50% support.

You still might have to "tweak" your worksheet with some figures - but I doubt you are going to arrive at >50%



Sandy

[David1980]

And if in the end the taxpayer doesn't understand why they can't claim their son, it may not be that they don't understand why they can't claim their son but rather why you won't let them claim their son (you evil preparer!!!)

Lots don't really care about tax law or correctness of returns. They think if they can get a preparer to sign off on it, if they get the refund, that they're fine. Most of the time they're probably right, sadly. And if they're talking with their friends/coworkers/hair stylists/whatever someone probably has a son who pays all his own support and the parents still claim the son so "if Bob can do it, why can't I?"

(I fire those clients. Maybe the client really doesn't understand how the son provided $17k towards his own support - I often find "support" in the eyes of a taxpayer is often composed of "whatever I spent, the kids expenses shouldn't count because he doesn't need mp3 players and concerts and booze and all that!")

[Gary2]

"The son had about $17K available, ...

"What's the parents' income range?"
$40,000

I might have stopped right there, without even getting into the detailed support work sheet. Son clearly has $17K available, parent only has $40K available to be split at least three ways (since 4 people in the household). Granted, this isn't a reliable picture - the FMV of the house rental may be unrelated to the income, due to inflation since the home was purchased, as well as all the other variables and fine points. However, it's an easier case to make to the parent: $40K divided by 4 is $10K/person. $17K divided by 1 is $17K. That's pretty compelling.

Note that the son seems to be below the requirements for claiming the refundable part of the AOC, which is a bummer. If the son is still in school, then the best you can do would be to advise that the son increase savings - e.g., open an IRA.

[geekgirldany]

Thank you all for posting.

Sandy, I downloaded TaxTools and you are correct. It is pretty similar to a worksheet I got from the IRS website. I really need to purchase that software but have rarely had to use it in the past. May change come next year.

David, you are right. From the email I received today I think it is leaning towards that. A couple of sentences asked did the IRS really need this expenses to be documented. My response is that it does and would.

Gary, you are right. Looking at it now I can see how it would not work. This is really the first situation I have come upon where the child is actually working so much that he can provide over 50%. Most of the time I only see income for $3,000 to $5,000. Not over $10,000.

Like I said he emailed me back saying again I should not include the household expenses because the son does not pay that. A few other comments relating to what would the IRS really need receipts on. I've already explained about the household expenses.

I basically told him like Gary suggested. How much they made divided by four versus what the son made and that he would have to show me proof of $16k of support. Finally that my position is that he can not claim the child as a dependent.

I mean that is my final answer as they say. I have spent alot of time on this going back and forth with him. I am not going to budge unless he proves the support. Also this really would not have even come up if I did not mention claiming the child. Parents or child filled out the tax return before talking to me.

I love email but would really like to talk to people on the phone when things like this come up.

Thank you all for your help and listening to me,
Dany

[dtlee]

I also don't see many places where additional entries would significantly change the verdict.

A couple of things might warrant a second look:

• As mentioned, if the $4,000 was a loan in the son's name, it is additional support he provided as mentioned above
• He paid for gasoline. Who provided the car? Was it a gift purchased this year from his parents or someone else? Is it in his name?
• Support for a qualifying child does not need to come solely from parents to allow claiming dependency. Were there any other supporters who provided something?
• FMV rental value of home should be as furnished. The amount in your worksheet would be quite low for my area (where an unfurnished home would likely be $3,000+ per month) but could be reasonable for your area.
• If he were a girl, I could never believe nothing was spent on clothes, but even for a boy, it still looks odd. Also, i know of no students who don't occasionally go out for at least fast food or a Starbucks.
• Is he covered under his parent's medical insurance? If so, there should be some value of insurance provided by them as support.
• What about medical, dental or eyeglass costs? Contacts?
• Are you sure he did not need books or supplies? Did he buy a computer for school this year or was one given to him? Either way, it is part of support.
• If the parents are providing use of a vehicle, you might be also able to compute a value of the vehicle based on what such a vehicle would cost (under other on 2k).
• Even if support or gifts were given by other relatives or friends, they contribute to total support.
• Was there a large birthday party or some major road trip he took?

I don't think any of this would put him over the top, but if the parents bought him a used car to go to school (even if they took out a loan), that plus the insurance they paid might be enough to make these other items make a difference. I suspect somewhere around $4,000 is missing just from clothing, meals he purchased, healthcare expenses and insurance, and use of the vehicle, gifts received, etc. But that would be offset by the $4,000 loan he took out. I doubt any changes would shift the balance toward support by others.