dependents

[Ken]

I think I remember hashing and re-hashing this last year but my head is a little extra hard so I would like some clarification again if someone doesn't mind.
I have a client who is living with his girl friend and between them they have a child. The girlfriend also has another child from a previous marriage but the husband is dead.

They have lived together for several years.

The "other" child gets social security because her father passed away.

can my client claim this child?

If the social security is the issue, could he claim the child if she were not getting social security?

On page 3-15 of the taxbook it says (under number 4) qualifying relatives. At the very bottom of the paragraph, "any other person who lived with the taxpayer all year as a member of the taxpayers household". can be claimed as a dependent.

However on page 3-16 and 3-17, I cant find any situations where taxpayer could claim this child.
What do you al think?
Please excuse me if you have already discussed this again this year. I just now got on here for the first time in several months. I've been way too busy with football season and all.

[Brad Imsdahl]

He can claim his own kid, but not his girlfriend's kid. First situation on page 3-17. The boyfriend can't claim his girlfriend's kid because the kid is a qualifying child of the girlfriend.

[jainen]

qualifying relative rule

>>"any other person who lived with the taxpayer all year as a member of the taxpayers household"<<

The qualifying relative rules are identical to the old rules for a dependent, with a single new exception--a person can't be a qualifying relative if she is a qualifying child to anybody else. Since the natural mother lives in the home, the girl is a qualifying child to the mother (unless the Social Security means the child provides more than half of her own support, in which case your client wouldn't be providing more than half anyway).

[Chief]

Ken

Hi Ken. How is the barbering business out in Arizona. Good to hear from you again.

[Ken]

dependent

The mother doesn't work and it seems to me that SOMEONE should be able to get credit for the dependent. The taxpayer supports them all.

[Ken]

hi Chief

Chief I'm still clipping away, only part time though. I am at an age where I dont want to do ANYTHING full time. Of course part time to me means going from about 60 hours a week to about 35, not counting what I do with taxes during tax season,

Ken

[veritas]

The mother doesn't work and it seems to me that SOMEONE should be able to get credit for the dependent. The taxpayer supports them all.

Read my quote

[Koss]

UDC: Deja vu all over again

The mother doesn't work and it seems to me that SOMEONE should be able to get credit for the dependent. The taxpayer supports them all.

Yes, this was discussed ad nauseam last year. The law and the rules for 2006 returns is the same as the law and the rules for 2005 returns.

The post above (within this thread) that says that he can't claim the child as a qualifying relative because the child is a qualifying child of his girlfriend reflects the way most people have interepreted the new rules.

But this interpretation leads to some serious problems in certain other scenarios, and there is a healthy strain of dissent on this question. There are alternate readings of the text of the new law that allow for the possibility that your client could claim the child, and these are not frivolous or absurd ideas.

I posted extensively on this last year, and also posted a couple articles on a private website. That website is under renovation right now.

The strongest support I have seen for an alternate reading of the law is a document published by the American Bar Association Section on Taxation, which discusses different possible interepretations for the text of the law which says that a qualifying relative cannot be "a qualifying child of any other taxpayer."

The authors of this document point out this could be read to mean that the child cannot be the qualifying child of anyone who has any income, or anyone who has any taxable income, or anyone who is required to file a return. In your case, you have said that the woman does not work, and if she has absolutely no income at all, she may not be a taxpayer.

This concept has been presented in a paper published by the ABA Section on Taxation, and sent to the House Ways and Means Committee with recommendations for addressing the problems, ambiguities, and paradoxes in the law.

I am NOT saying that the ABA has adopted, or advocated, or recommended this interpretation of the law. But the authors of the report presented it as one possible reading of the law.

Last year when I suggested that the woman might not be a taxpayer, and that this would allow someone else to claim the child, I was openly ridiculed by a few people on this board and the other one, with comments to the effect that "everyone is a taxpayer." One guy actually suggested that even a nonworking spouse somehow receives compensation from her husband in the form of food, clothing and shelter.

Now that's ridiculous. The husband may be providing support to his wife and kids, but that support is not income to those individuals.

The definition of the term taxpayer found in the IRC is:

Any person subject to any internal revenue tax.

If you have zero income, you are not subject to any internal revenue tax.

This is not a goofball tax-protestor theory. You simply have to read the ABA report, and when I get a chance, I'll publish the link.

By the way, there are US Tax Court rulings that state that certain entities, such as partnerships, are not taxpayers. (For those who have forgotten, partnerships are pass-through entities that never pay any taxes). Partnerships are subject to the Internal Revenue Code, and they are indeed required to file a return. But they are not subject to any internal revenue tax, and therefore, in certain contexts, the courts have ruled that they are not taxpayers.

If what they really meant was that a qualifying relative cannot be the qualifying child of any other individual, then they should have used that term when they wrote the law.

Burton M. Koss

[dsi]

It' my understanding that more than one of our professional organizations have requested some clarification from theIRS regarding QC and QR. To date theIRS has not addressed these concerns. Doesn't it make you wander why they won't address them?

[Brad Imsdahl]

It is a good theory, but here is the reason it will not fly.

A taxpayer is defined at IRC Section 7701(a)(14) as follows: “The term "taxpayer" means any person subject to any internal revenue tax.”

In certain cases, the regulations also apply this term to trusts, estates, partnerships, associations, and corporations even when the entity itself may not be subject to tax at the entity level [Reg. Section 1.441-1(b)(8)].

Thus, the definition is not necessarily restricted to a person who actually pays an internal revenue tax in the current year. Even if you ignore the pass-through entity exceptions, an individual is still called a taxpayer for merely being subject to tax, whether or not the taxpayer actually pays out any money as tax in the current year.

An example of this is found at IRC Section 32(a)(1) which says, “In the case of an eligible individual there shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to the credit percentage of so much of the taxpayer's earned income for the taxable year as does not exceed the earned income amount.”

Section 32 is more commonly known as the Earned Income Credit (EIC). Does anyone here have any clients who get more back in EIC than pay in? Even though this credit makes an individual a negative taxpayer, such individual is still referred to in the code as a taxpayer.

Another example is IRC Section 1(h) which says, “If a taxpayer has a net capital gain for any taxable year, the tax imposed by this section for such taxable year shall not exceed the sum of...”

“...B) 5 percent (0 percent in the case of taxable years beginning after 2007) of so much of the adjusted net capital gain (or, if less, taxable income) as does not exceed the excess (if any) of…”

Interesting, that this individual subject to a zero percent tax rate starting in 2008 is still referred to as a taxpayer.

Is a single Mom living at home not earning any income subject to any internal revenue tax? Of course she is. The key here is she is subject to the tax laws of the Internal Revenue Code, which makes her a taxpayer, even in a year when she doesn’t actually pay any tax.

[jainen]

cautious study

>>IRS has not addressed these concerns<<

IRS has issued some guidance. For one thing, they clarified that the new definition is indeed "unified." A person can not be a qualified child for one taxpayer under the dependency rules, and a QC for a different taxpayer under the EIC rules. That was a question that came up in the same discussion.

>>why they won't address them<<

Remember that unless Congress instructs it to issue regulations, IRS is limited to administrative concerns . The legislature makes the basic law, and the courts interpret it, so IRS can't just respond to questions about law without a great deal of cautious study.

[New York Enrolled Agent]

I think Burton is right on - it is beyond belief that Congress intended to have no one claim the child. As Dave S. notes, NAEA sent a letter to Commissioner Everson in February, 2006 expressing a number of concerns with the new §152.

One part of its contents read as folows:

[begin section] The first problem is in the interaction between the rules for a qualifying child and the rules for a qualifying relative. IRC §152 states that a qualifying relative cannot be the qualifying child of any other TAXPAYER (emphasis added). In IRS publications this has been translated into language such as the qualifying child of anyone else or the qualifying child of another person. The ambiguity is puzzling and leaves us to ask whether these are just nuances or significant changes? Perhaps it’s best to illustrate the problems by using examples.

A boyfriend (age 30) who lives with and completely supports his girlfriend (age 28) and her son (age 5) would be able to claim the girlfriend as a qualifying relative but would not be able to claim the girlfriend’s son. This is because the son meets the definition of a qualifying child with respect to the girlfriend, even if the girlfriend (it is assumed in both examples the girlfriend has no income) does not file a tax return or claim any tax benefits using the son.
Now assume the boyfriend is 60, the girlfriend is 58, and the son (who does not work or earn any income) is 35. What happens now? The boyfriend can claim both the girlfriend and the son as qualifying relatives.
It does not make sense that the intent of the law was to only allow older dependents to be claimed in these examples. Did Congress really intend to not allow anyone to claim the child in example 1? [end section].

Burton and Brad can give good arguments on both sides of the "taxpayer" wording. But, the bottom line is - it is truly beyond any RATIONAL belief that Congress or the tax writers who work for them intended the different consequences in examples 1 and 2. I think the intent of Congress was to stop the problem with more than one person claiming the same child but the law of unintended consequences reared its ugly head.

[jainen]

perfect sense in politics

>>it is truly beyond any RATIONAL belief that Congress... <<

You should join the other thread about Form 1040-PC, where they are exploring the idea that "it's about controlling how we live." The tax code is entirely rational viewed politically, and your suggestion that SOMEBODY should be able to claim the child is just a different political position.

Right or wrong, Congress DOES want to penalize unmarried couples. There is a very long-standing commitment to encouraging marriage as a social policy. That was originally why the filing status MFJ got preferential treatment (and where "the law of unintended consequences reared its ugly head" for two-income families.)

Remember that the definition of qualified child is not new. It dates back many years and was first applied to allow wealthy families to claim EIC, a seemingly irrational rule that makes perfect sense in politics.

[Ken]

thanks everyone

Boy! I have really enjoyed reading all these responses to this question.

This is what really makes this message board valuable to me.
I have been doing taxes for 23 years now but I work alone in an in home office and I dont have anyone to bounce these things off from.

This is REALLY a real live case and I am still torn. I really believe that the taxpayer in this case should be able to claim the child.

Thanks again for your answers.
Ken

[Bird Legs]

Ken, are you

the barber that my clients keep telling me they get their tax information from?
About 80% tells me that their barber says they can deduct this or do that on the tax return.