Dependent ,Lives with Taxpayer Can She Claim

[photoman]

I have a taxpayer that has a 16 year old girl that lives 24/7 with her for the entire year. My client is divorced and we filed single no dependents last year. This girls parents were getting a divorce and one moved out of state and the other lives out of town. They abandoned the girl. My client took her in and has been awarded Defacto Custodian for the girl. When we file 2011 taxes she will have lived with my client the entire year and my client has paid all expenses of the girl. The girl is a full time student and has no income and the parents of the girl have not given the girl or my client any money this year. CAN WE CLAIM THE GIRL AS A DEPENDENT AND FILE HOH. My client is of no relation or blood kin to this girl. She is also not adopting her. Any help would be appreciated.

Thanks, Ron

[Kram BergGold]

claim her

This dependent is a qualifying relative. She is not a qualifying child of anyone (child fails the member of household test for the parents). To claim a dependent under QR rules the claimant has to provide over 50% of support. Your client is the only one who can legally claim this child.

[Jesse]

Agree the child would be a qualifying relative and a dependent, however, this qualifying relative would not qualify the taxpayer for the Head of Household status.

http://www.irs.gov/publications/p501/ar02.html#en_US_2011_publink1000220823

[Gretel]

I would think that this child qualifies as foster child. It appears that some official agency has awarded custody. A foster child is a qualifying child for HOH.

[Jesse]

You could very well be correct, I'm not sure what "Defacto Custodian" means. State law would probably determine, I don't know?

[Koss]

Foster Child

The question of whether the child is a foster child hinges on what action was taken, and by whom, to place the child in the custody of the taxpayer.

According to the IRS,

A foster child is an individual who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

If the child is indeed a foster child, then the taxpayer can use HoH filing status, and may also be eligible for the Child Tax Credit and the Earned Income Credit.

In any case, even if the child is not a foster child, I agree that the taxpayer can still claim the child as a dependent under the rules for a qualifying relative.

BMK

[FEDUKE404]

Foster child

Like others, I agree that a true "foster child" within the IRS criteria would likely qualify the taxpayer to use HOH et al.

But I have no earthly idea of what a de facto custodian means in this situation.

From the very limited amount of information I reviewed, the "definition" can vary from state to state and can require the child to live with the substitute family for a minimum of either six months or one year.

You probably need a legal opinion on this one.....

FE

[Gary2]

But I have no earthly idea of what a de facto custodian means in this situation.

From the very limited amount of information I reviewed, the "definition" can vary from state to state and can require the child to live with the substitute family for a minimum of either six months or one year.

You probably need a legal opinion on this one.....

Being "awarded Defacto Custodian" sounds like a contradiction in terms, so I don't understand it either.

But I can't see how there can be any minimum living requirement for IRS purposes. The code explicitly says "placed with the taxpayer." It doesn't mention guardianship issues. I haven't checked the regs, but it sounds like that requirement is met immediately, regardless of whatever legal status changes in six or 12 months.

[Koss]

No lawyer needed on this one

I agree that the question of whether a child is a foster child, as this term is defined by the Internal Revenue Code, does involve state law to a certain degree. But I don't think a "legal opinion" from an attorney is necessary or useful in a case like this.

There are a few areas of the tax code which explicitly look to state law to determine certain issues. This isn't one of them.

As I noted in my earlier post, the IRS position is that

A foster child is an individual who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

I'm going to stick my neck out here, and say that a nonlawyer can use common sense to interpret this.

For the record, I think we all agree that even if the child in this case is not a foster child, the fact pattern indicates that the taxpayer can claim the child as a dependent under the rules for a qualifying relative. The question is whether the child is a qualifying child. If so, then the taxpayer can also have HoH filing status, EIC, and child tax credit.

To me, the issue is crystal clear. The tax pro has to ask the taxpayer if the child was "placed with [the taxpayer] by an authorized placement agency," or by a court order.

If the answer is yes, then the taxpayer should produce a copy of the court order or some other documents provided by the placement agency. If the taxpayer can't produce such a document, I would not take the position on the return that the child is a qualifying child.

I agree that the phrase "awarded defacto custodian," used in the original post, is confusing. The confusion can be cleared up with just one or two questions, and by reviewing whatever documentation the taxpayer has.

If the "award" was made by a court or an authorized placement agency, then you have what you need.

On the other hand, there may not be a court order or placement. It is possible that the taxpayer simply told the tax pro, "I am her defacto custodian." The tax pro may have assumed that this is a legal term with a specific meaning, and may have also assumed that since the taxpayer was using this phrase, that the status of "defacto custodian" must have been "awarded" by the court or by an agency.

These are not valid assumptions. The taxpayer has to be asked to produce some documentation. But you don't need to get a lawyer involved.

BMK

[Koss]

Further thoughts

The terms custodian and guardianship are not interchangeable. But they do have a certain general meaning that actually does not vary significantly from state to state. If the taxpayer has a court order or placement, it doesn't usually take a lawyer to interpret it. If they don't have a court order or placement by an agency, then it's not a qualifying child. End of story.

But you may have to really grill the client in some cases. They can get remarkably creative.

Years ago, when I worked at a storefront chain, I got a client who had been coming to the office for several years, and in earlier years, other tax pros had allowed her to claim a child that was not her son, without asking a lot of questions.

This may have been back in 2006 when the rules changed. So I'm not necessarily saying that the returns were done wrong in the previous years. But I had to ask the question three or four different ways before I got a straight answer. At one point, she claimed that there was in fact a "court order." In response to more detailed questions, she told me that the child, who I think was 17 or 18, had been "placed" in her home by the terms of his probation. The kid had gotten in trouble, and the terms of his probation stated that for a certain period of time, he had to live in the home that belonged to my client. But that home also happened to be the residence of the kid's father, who just happened to be my client's boyfriend.

Talk about tortured logic. I think I finally figured it out, or managed to extract the entire fact pattern out of her, when I asked her if the court order had her name in it anywhere. No, she said, it did not, but it said the kid had to reside with his father, at 881 Mill Street, and "the house is mine," she explained. So in her view, the probation order had "placed the child in her home."

Ummmm... No.

I didn't need a lawyer for that one, and I didn't even need to see the court order.

You just have to ask the right questions.

The other one you have to watch out for is when a married couple is separated, and the client tells you that she moved out of the marital home, taking the kids with her, in July or August. As we all know, with less than six months apart, she doesn't qualify for Head of Household.

Unless they are legally separated. The problem is that legal separation doesn't exist in most states, and in those that still have such a thing, it is never used.

If you quote this language from Publication 17, the client may try to tell you that "there is a court order" which says that they are separated, or something like that. This is at the point where she has already admitted that they didn't separate until July or later, so she can't change her story about the time line. So she may start grasping at straws in an effort to avoid MFS.

Sometimes there is in fact a court order for child support, or for temporary custody of the children. In other cases, where domestic violence is involved, the woman may have a protective order keeping the guy away from her.

Unfortunately, none of these are a legal separation as this term is used by the IRS.

BMK

[Gary2]

A wonderful analysis, as usual.

I had one more thought on the "defacto custodian" phrase. There could be a finding of fact that the taxpayer is the defacto custodian. In other words, a court could - for whatever reason - reach a factual conclusion that the taxpayer has been doing all the things that a custodian normally does, separate from any conclusion about legal custodianship or guardianship. This could merely be an aside (even judges get distracted when writing decisions), or it could feed into some very narrow legal conclusion. For example, hypothetically, it might be a decision allowing the 16 year old to attend school in the taxpayer's school district.

I wouldn't interpret something that narrow as being a placement. I'd even be reluctant if the court papers narrowly granted some authoritative rights to the taxpayer (e.g. sign specific school or medical papers, be the contact person of record, etc.) or temporarily granted them (e.g. until the next hearing when the parents will have a chance to intercede).

Hopefully, the papers won't be this ambiguous.

[Gary2]

Years ago, when I worked at a storefront chain, I got a client who had been coming to the office for several years, and in earlier years, other tax pros had allowed her to claim a child that was not her son, without asking a lot of questions.

I've had those. It's not just asking the right questions, but listening to the answers, e.g. "she's just like a daughter to me" or "he calls me dad, I call him son."

They critical factor in getting these right is having a boss who will back you up, even as the client walks out the door.

[JohnH]

I find that when the client has an ambiguous situation, they usually really appreciate me taking the time to ask all the relevant questions. That way, when I tell them I can't prepare the return the way they want and they decide to go somewhere else, they have a better idea about what lies to tell the next preparer.

[photoman]

Thanks for all the help Ron

Much appreciated