New client(TP) filed single in 2014. I am looking at TP's 2014 and I see preparer didn't deduct home office exps that qualify. It could be the TP had about $1700 in W-2 wages and $2200 in net profit Sch C and the preparer didn't want to raise any flags. If I were to amend and add additional qualifying Sch C expenses, it would generate a refund but should I be concerned the IRS could flag this return on the basis how can anyone live on that amt of money? TP does receive child support from ex and if need be, TP's parents help out. Due to low income, medical insurance is free and TP rents. Is my concerned unwarranted?
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Sounds like EIC may be involved? Would the addl expenses on Sche C affect that? She gets child support, but does not claim child as exemption? The income you mention would not incur an income tax liability, just SE. -
Correct Burke
Yes EIC is involved. No child to claim but I think the previous preparer missed it and TP should have claimed at least one of the 2 kids for as I understand TP, she paid over 50% support. Correct only SE. Amending the return would show $0 Business income.Originally posted by Burke View PostComment
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Under qualifying child rules the support requirement is that the child does not provide over half their own support. It does not matter who provides the support (as long as it's not the child). If tie-breaker rules applied, would the other parent win the exemption?Originally posted by AZ-Tax View PostComment
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Office in home
In theory you should be OK to claim the OIH expenses.
However, with the facts presented, I would be VERY careful to be sure your client fully meets the guidelines (starting with "regular and exclusive use") for any allowable Form 8829 expenses. Also, you need to be careful if there is any overlap between W2 "office expenses" and Schedule C "office expenses."
Also, does anyone other than your client and her child(ren) live in the residence? Head of household? Who claims the child(ren) as dependent(s) and does the taxpayer claim her own exemption?
Proceed carefully. . .
FEComment
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The EIC table game
IRS has become aware of a scheme used by some taxpayers to maximize their EIC by contriving their income to apply the maximum EIC benefit from the EIC table. Just looking at the table, you will note that the EIC amount rises with the amount of income until a maximum range is reached, and from the point of diminishing return then reduces and phases out eventually to zero as income continues to rise.
The "game" is a purposeful attempt to report the amount of income which lands in this maximum range. If a taxpayer is self-employed this can be done by failing to report ordinary expenses which are available to him. This is a contrivance, and is frowned on by the IRS to the extent that a question is used in the worksheet which asks if all expected expenses have been taken.
Report ALL expenses you would normally expect to report on a consistent basis from one year to the next. Sometimes the taxpayer will land in the maximum range, but this would be a legitimate result and not a contrived result. Big difference.
I believe the broad elections in choosing depreciation for current year purchases CAN legitimately be used to plan EIC maximization. This, to me, is a contrivance device which is allowed, and can be part of smart tax planning.Comment
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Answer to questions
No 2106 required for clients W-2 income. Client in 2014 filed single and will in 2015 so no HOH. Ex husband claimed kids in 2014 and most likely in 2015. Client and one of her children but not everyday and according to my client, over half the year.Originally posted by FEDUKE404 View PostLast edited by AZ-Tax; 05-05-2016, 06:01 AM.Comment
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Including legitimate OIH expenses on the tax return does not change the calculation of how much money was spent on the home (support), it only changes it from non deductible for tax to deductible. So yes, your concern about that particular item is unwarranted. The issue of whether there is enough income to carry the lifestyle exists the same either way; if they are going to flag it, they will.Originally posted by AZ-Tax View Post
If you have done your due diligence and have prepared a complete and accurate return, you shouldn't be concerned about signing. Whether or not to amend is always the taxpayers's choice, not yours."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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Can you clarify that? Are you saying your client had at least one of her children live with her for over half of the year? If so, she qualifies as the custodial parent (unless they got divorced in 2015, and child lived with Dad more than Mom). As custodial parent, she probably qualifies for EIC based on the child, and potentially Head of Household. Dad could only claim the child with form 8332.Originally posted by AZ-Tax View Post
As for your original question, if she can document her income and expenses, I would recommend the client amend and take the deduction. However, be careful that with that small of Schedule C income that it isn't actually a "hobby", and that the office is used "regularly and exclusively" for business. Although this isn't a direct requirement for the actual expenses on Form 8829, the Simplified Home Office deduction requires 15 days of business use per month. That gives you an idea how the IRS may interpret what "regularly" means.
A person does not need to live on a their income; They can live on many other sources of money (as you mentioned, child support). In many cases, a single person may be living with a boyfriend or girlfriend that pays for most of the bills, so the taxpayer may not need much income, if any. So income on the low tax return shouldn't be a significant 'red flag'.Comment
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