Child Dependency of Child in State funded Facility

[KC-CPA]

Client has child who lived with them for two years (he is a nephew) both parents are deceased. However, the nephew did not live with them this year because they decided it would be better to place him in a home for children with disabilities.

They are still the legal guardian but really provide minimal support for the child. The clients still visit and look after him but really do not provide much financial support because there is not much needed.

[Koss]

Dependency Tests

If they hold legal guardianship, then the relationship test for a qualifying child has been met.

I'm going to assume that the child is under age 19, so the age test for a qualifying child has been met.

I'm going to assume that the child did not provide more than half of his own support, so the support test for a qualifying child has been met.

The fact that your clients are not providing much support for the child is irrelevant.

The key question here is whether the residency test is met.

The placement in the home for special needs children may be a temporary absence from your clients' home. Or it may not be. You'll have to ask some questions.

BMK

[KC-CPA]

Yes, the child is 14, I do not believe the clients intend on the child coming back to stay with them or view this arrangement as temporary...

[Koss]

Dependency

The question of whether an absence is temporary is based on all the facts and circumstances, and is determined on a case-by-case basis.

Federal tax law doesn't always "make sense," and particularly when it comes to the rules for dependency, there are sometimes unintended consequences or unexpected results. See, for example, a recent thread in which we came to the conclusion that a child who is not a dependent is still subject to the Kiddie Tax, and cannot claim the refundable portion of the American Opportunity Credit.

http://forum.thetaxbook.com/showthread.php?23794

Doesn't seem fair, but that's the way it is.

In general, I see it as my responsibility to interpret the tax code for my client. When there is more than one possible interpretation, I explain this to the client, and let them make the final decision. It is not only appropriate, but necessary in many cases, to discuss with the client the question of how likely it is that the IRS would examine the return, and how likely it is that the IRS would accept a particular position or interpretation.

In general, I try not to allow my personal opinion, or any kind of moral judgment, to influence my interpretation of the tax law or the advice that I give my clients.

With all that being said...

On the fact pattern you have described here...

If they are not providing any significant financial support to the child, and they do not think of the child as actually living with them...

why do they feel that it is appropriate to claim the child as a dependent?

BMK

[Koss]

Further thoughts...

Does the "home for children with disabilities" where the child is now living have the right to expel the child, or terminate his residency there?

I suspect the answer is yes.

If this is the case, the next question is:

If the home expelled him, would your clients--who are the child's legal guardians--have a legal responsibility to take care of the child, in their home, at least until some other arrangements could be made?

If so, then it is arguably a temporary absence.

If they have not been relieved of their legal responsibility for the child, then they are arguably entitled to continue receiving the tax benefit.

BMK