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    Son Not Allowed As Dependent

    I am preparing a tax return for parents who have claimed their son as their dependent for all of his life as he had no income and was a student. But this year the son received a 1099-B from his investment firm which reported about $22,334 of gross stock sales and net gains of about $2200. This plus interest and dividends brings the son's gross income to a little over $4700. Since the son is 25 years old he may not be allowed as a child but could be claimed as a Qualifying Relative but for the fact that his gross income exceeds $3700 which disallows him as a dependent. The son and parents had no idea of WHY the investment firm sold his stock and by so doing caused them to lose the son as a dependent. And I wonder if the GROSS SALES of the stock should be considered in determing if his gross income exceeded $3700. I thought this was interesting.

    #2
    Gross Income Defined

    I don't think gross income includes the gross proceeds from the sale of stock.

    It definitely includes gross rental income. This is explicitly stated in Publication 17, in the section that discusses the gross income test for a qualifying relative. But that section doesn't address stock sales.

    Geez, what if...

    Suppose your 35-year old unemployed brother, who is not disabled, lives with you all year and is supported by you. And during the year, he continuously plays the stock market, in an e-Trade account that has an aggregate value of about $10K. He buys and sells stock once or twice a week. Sometimes he wins, sometimes he loses. This isn't day trading; it's just gambling. And at the end of the year, after all the commissions, he's got a net capital gain of about $2500. And he has no other income.

    But with dozens of stock sales, he gets a 1099-B that has gross proceeds of...

    Six figures.

    It's not gross income. It's an illusion. He's recycling the funds.

    Geez, what if someone sold a rental property? At a loss?

    It doesn't disqualify him as a dependent.

    Gross income is defined in IRC 61:

    Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:
    (1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
    (2) Gross income derived from business;
    (3) Gains derived from dealings in property;
    (4) Interest;
    (5) Rents;
    (6) Royalties;
    (7) Dividends;
    (8) Alimony and separate maintenance payments;
    (9) Annuities;
    (10) Income from life insurance and endowment contracts;
    (11) Pensions;
    (12) Income from discharge of indebtedness;
    (13) Distributive share of partnership gross income;
    (14) Income in respect of a decedent; and
    (15) Income from an interest in an estate or trust.
    [emphasis supplied]
    Now, if your client's kid has a net capital gain that puts him over the $3700 threshold, then they're out of luck.

    BMK
    Last edited by Koss; 03-14-2012, 07:51 AM.
    Burton M. Koss
    koss@usakoss.net

    ____________________________________
    The map is not the territory...
    and the instruction book is not the process.

    Comment


      #3
      Originally posted by dyne View Post
      I am preparing a tax return for parents who have claimed their son as their dependent for all of his life as he had no income and was a student. But this year the son received a 1099-B from his investment firm which reported about $22,334 of gross stock sales and net gains of about $2200. This plus interest and dividends brings the son's gross income to a little over $4700. Since the son is 25 years old he may not be allowed as a child but could be claimed as a Qualifying Relative but for the fact that his gross income exceeds $3700 which disallows him as a dependent. The son and parents had no idea of WHY the investment firm sold his stock and by so doing caused them to lose the son as a dependent. And I wonder if the GROSS SALES of the stock should be considered in determing if his gross income exceeded $3700. I thought this was interesting.
      As Burton indicates, gross income includes net gains from stocks, interest, and dividends which you computed as totalling over $4,700 for your client's son. Thus, unless he is considered disabled and thus eligible to be claimed as a Qualifying Child, the son cannot be a dependent since the Gross Income Test for a Qualifying Relative is failed. You probably are aware of this but you can still claim any medical expenses incurred for the son on the parents' return since the Gross Income Test is the only test you indicate is failed.
      Doug

      Comment


        #4
        One wonders

        Originally posted by dyne View Post
        The son and parents had no idea of WHY the investment firm sold his stock and by so doing caused them to lose the son as a dependent.
        Well, I wonder if they really had no idea why the investment firm sold the stock, or if they just had no idea how it would affect their taxes. I am a glass is half broken kinda girl.
        If you loan someone $20 and never see them again, it was probably worth it.

        Comment


          #5
          Originally posted by RitaB View Post
          Well, I wonder if they really had no idea why the investment firm sold the stock, or if they just had no idea how it would affect their taxes. I am a glass is half broken kinda girl.
          Usually what happens is that a person decides to withdraw money from their "account" to pay for some expenses and has no idea that this is any different than taking money out of your bank account. I have had this discussion many times with clients (with some clients I have this discussion annually when I see the account, I remind them that they will have to pay taxes if they ever withdraw money from this account). One client withdraws a small percentage of her "account" every month for living expenses creating gains, losses, and wash sales across several different mutual funds.
          Doug

          Comment


            #6
            I am dealing with the wife and have never met the husband but she stated again this
            morning that they had NO idea why the investmet company sold some of their stock
            and some of the son's stock.
            No, the son was not disabled.
            The problem is that the tax law is wrong. It says that the GAIN or loss on stock sales
            is considered in determining whether a taxpayer must file a tax return. But recently it
            was reported on this another tax message board that IRS mailed a CP-2000 or other
            letter to a taxpayer who did not file a return proposing to assess about $3,000 in tax.
            IRS proposed tax on the GROSS stock sales allowing NO cost or basis. So if we
            follow the tax law we could get our clients in trouble. In this case it is a moot point since
            the son's gross income was $4700. Thank you for the comments.

            Comment


              #7
              Originally posted by dyne View Post
              I...The problem is that the tax law is wrong. It says that the GAIN or loss on stock sales
              is considered in determining whether a taxpayer must file a tax return. But recently it
              was reported on this another tax message board that IRS mailed a CP-2000 or other
              letter to a taxpayer who did not file a return proposing to assess about $3,000 in tax.
              IRS proposed tax on the GROSS stock sales allowing NO cost or basis. So if we
              follow the tax law we could get our clients in trouble. In this case it is a moot point since
              the son's gross income was $4700. Thank you for the comments.
              But that happens rarely I think. So, if people don't file because their gains from sales are under the filing requirement I just warn them of this possibility and at THAT time we can file a return if need be. And in the future that even won't be a problem with the reporting of basis to the IRS.
              JG

              Comment


                #8
                Originally posted by dyne View Post
                The problem is that the tax law is wrong. It says that the GAIN or loss on stock sales
                is considered in determining whether a taxpayer must file a tax return. But recently it
                was reported on this another tax message board that IRS mailed a CP-2000 or other
                letter to a taxpayer who did not file a return proposing to assess about $3,000 in tax.
                IRS proposed tax on the GROSS stock sales allowing NO cost or basis. So if we
                follow the tax law we could get our clients in trouble. In this case it is a moot point since
                the son's gross income was $4700. Thank you for the comments.
                I do not think the tax law is wrong. The fact that the IRS cannot determine if the filing requirements are or are not met does not mean that the filing requirements are wrong. I have had a situation like you describe and have contacted the IRS and told them the basis over the phone. In that phone call, they never once asked me to send in a return showing that information, because no return was required given the information I provided.

                I routinely file returns that are not required. Sometimes I file them to document the cost of the stock sold. Sometimes I file to claim a credit that requires a tax return. Sometimes I file to declare or carry forward a capital loss. I have even filed to document a charitable contribution carryforward. Some clients feel more comfortable filing a return each year. In this area, some clients need a tax return to apply for other benefits and I will not give them a "pretend" tax return that they are not willing to sign and file.

                Even when a client is not required to file and does not file, I have generally given them a copy of what I would have filed. This is for two reasons; to make sure that the carryforwards of capital losses and charitable contributions and IRA basis and energy credits taken are not lost by my software and also to document what information they gave me to come to the conclusion that no return is required.

                Thanks.
                Last edited by dtlee; 03-14-2012, 11:46 AM.
                Doug

                Comment


                  #9
                  Originally posted by JG EA View Post
                  But that happens rarely I think. So, if people don't file because their gains from sales are under the filing requirement I just warn them of this possibility and at THAT time we can file a return if need be. And in the future that even won't be a problem with the reporting of basis to the IRS.

                  Actually, this happens a lot. Unreported stock sales (but I had a loss!) or misreported stock sales generate more CP2000 notices than anything else, IMHO. One good thing about the new basis reporting requirements is that eventually these notices will cease, since the IRS will know if it is a gain or loss.

                  Comment


                    #10
                    Reason for sale could be many

                    Originally posted by RitaB View Post
                    Well, I wonder if they really had no idea why the investment firm sold the stock, or if they just had no idea how it would affect their taxes. I am a glass is half broken kinda girl.
                    Another quite possible scenario is that nothing was "sold" per se but rather a corporate action (takeover, buy-out, or whatever) occurred to generate the sale.

                    Of course, this assumes the parents have not been a bit evasive as to whatever financial assets Little Johnny might own.

                    BTW: Wonder if they ever heard of Form 8615, especially since the IRS (several years ago) redefined the "age" of the kiddie? A lot of college-age children with investment income provided by well-intentioned parents can now get snagged.

                    FE

                    Comment


                      #11
                      UTMA or UGMA?

                      Since this triggered when he turned 25 (or that is what it sounds like) it may be an UTMA or UGMA account that he aged out. Someone needs to talk to the broker or to Jr. Someone got that money, even if it was just moved from one account to another. But I agree with everyone else, he is not Mom and Dad's dependent this year.

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