Filing issues related to new ruling.

[quicksam]

I have an unusual situation.

I have a man that lives in his house. He has a woman living there that has a son and a daughter. The daughter has a 2 year old also. These kids are not the taxpayers. The son is 15 and the daughter is 17(the one with the baby).

The taxpayer made around $50,000. The woman made $3,315. The daughter worked and made about $4,000.

I'm trying to figure the best way to file the three tax returns to benefit the most since the clarification came out on the qualifying relative.

My thinking is that the woman files her return not claiming her own exemption and filing for the EIC on the son and daughter. The daughter files her own return marking dependent of another and just receiving what she paid in. The taxpayer claims the woman as a dependent and the womans granddaughter as a dependent.

The daughter could not claim the EIC because she was the qualifying child for EIC for someone else.

The woman seems to be able to claim the EIC on the two kids even though she doesn't claim her own exemption.

I believe the grandbaby is eligible to be claimed by the taxpayer because the daughter (or baby's Mother) only filed for a refund of taxes paid.

This looks like the best scenario for this family to file. What do you all think?

My head hurts,

Lester

ps. They all lived together for the whole year.

[quicksam]

Some on another board believe that I could let the daughter claim the EIC on her brother and the grandchild. They believe that since the woman would only be filing to claim a refund that the daughter is no longer her qualifying child so therefore the daughter could claim the EIC.

I somehow don't think the IRS cleared this up very good. The Notice 2008-5 clearly states that the notice is to only clear up the section section 152(d)(1)(D) which relates to dependency issues when deciding if someone is a qualifying relative. I don't believe it is a blanket notice on all the rules dealing with qualifying child issues.

Rule 10 under claiming EIC clearly states that if a child meets three test for being a qualifying child for EIC purposes then the child cannot claim EIC on their return even if their parent doesn't claim the EIC.
I believe this rule to still be true. I don't believe the notice 2008-5 relates
to this rule. It keeps saying in the notice it is for the purpose of section 152.

I would really like to be wrong on this.

Any thoughts.

Lester

[Koss]

Agree with you, but...

I think you are correct that the 17-year old cannot claim EIC, because she meets the criteria to be a qualifying child--for purposes of EIC--for another taxpayer, i.e., her mother.

I agree that IRS Notice 2008-5 appears to be directed only at the question of whether a person is "a qualifying child of another taxpayer" when determining whether someone may claim a dependent exemption for that person under the rules for qualifying relative. The notice does not address the rules for claiming EIC in any way.

The text of the IRC 32, for EIC, reads as follows:

If an individual is the qualifying child of a taxpayer for any taxable year of such taxpayer beginning in a calendar year, such individual shall not be treated as an eligible individual for any taxable year of such individual beginning in such calendar year.

IRC 32 then defines qualifying child as

The term “qualifying child” means a qualifying child of the taxpayer (as defined in section 152 (c), determined without regard to paragraph (1)(D) thereof and section 152 (e)).

Section 152(c), of course, contains the four tests: age, residency, relationship, and support. The support test is explicitly excluded for EIC. Support is in 152(c)(1)(D). So this means that a qualifying child for EIC is a qualifying child as defined in 152(c), without regard to the support test.

On the surface, it appears that the 17-year old is still considered a qualifying child of another taxpayer--her mother--because she meets the criteria, and this makes her ineligible for EIC.

So I agree, that on the surface, Notice 2008-5 does not appear to apply to the rules for EIC.

But this is the same logic that was used to argue previously that a nine-year old cannot be the qualifying relative of an unrelated adult if he is living in the same household with his twin brother, and this is the same logic that was used to argue that your client--the adult male--cannot claim any of the minor children as a dependent. The theory was that all three of these children are the qualifying children of the adult female, even if she had no income at all. The claim was that the qualifying child relation exists independently of any of the benefits. It was argued that even if the "taxpayer" was not eligible for HOH, EIC, Child Tax Credit, Child Care Credit, or the dependent exemption, the "taxpayer" still has a qualifying child, because the four tests, or, in the case of EIC, three tests, are met.

So the logic used in Notice 2008-5 could arguably be extended to determine that the 17-year old is not a qualifying child of her mother.

I agree with you that this is still is a huge mess, and the notice doesn't answer all of the questions that have been raised.

Your scenario actually presents another complex problem:

You argue that the guy can claim the infant as a qualifying relative, and you assert that the child is not the qualifying child of the 17-year old, because the 17-year old filed a return only to get a refund of tax withheld. That's correct and consistent with the IRS notice.

But the infant is also the qualifying child of its grandmother--your client's domestic partner.

And although she is not claiming any benefits associated with that child on her tax return... the child nevertheless appears to be her qualifying child... and...

if she claims EIC for her son and daughter, then...

she is not filing a tax return "only to get a refund of tax withheld." She is now claiming a refundable credit, even though it does not flow from that child.

Thus, unfortunately, I would have to conclude that if either of the two women files a return for any reason other than a refund of tax withheld, this would appear to disqualify your client from claiming a dependent exemption for anyone other than his partner (the grandmother).

Congress really needs to just scrap this thing and go back to the drawing board.

There is no uniform definition of a qualifying child. Each of the five code sections--HOH, EIC, CTC, CDC, and dependency--has a different definition of a qualifying child, and each of those definitions merely incorporates by reference the definition in 152(c). Each definition is nevertheless different, because each code section adds or subtracts something from 152(c). Thus, the definition of a qualifying child cannot stand on its own. It exists only within the context of one of the five code sections in question.

Because of this, a child can be a qualifying child of an individual with respect to one or two of the five code sections, but not the others.

So to some degree, the original problem remains: if a child meets the criteria for a qualifying child for one of the code sections, but not the others, does this mean that the child is still the qualifying child of that taxpayer for purposes of determining whether some other taxpayer may claim a benefit under one of the other code sections?

What a disaster...

Burton M. Koss
koss@usakoss.net

[joanmcq]

I agree with your reasoning except that if any of the women claims EIC or files for any reason other than to claim a refund of withholding, then none of the children OR the grandmother (partner of male) can be claimed as dependents by the man.

[Koss]

EIC vs. Dependent

I agree with your reasoning except that if any of the women claims EIC or files for any reason other than to claim a refund of withholding, then none of the children OR the grandmother (partner of male) can be claimed as dependents by the man.

How do you reach the conclusion that the guy cannot claim his female partner as a dependent?

She meets all the criteria for the dependent exemption under the rules for qualifying relative. She cannot claim her own exemption, even if the guy chooses not to claim her as a dependent for some reason.

The fact that she is his dependent does not preclude her from claiming EIC with a qualifying child. It only precludes her from claiming EIC without a qualifying child. And the fact that she claims EIC with a qualifying child does not preclude him from claiming her as a dependent.

The rules are:

- a dependent cannot claim a dependent exemption (or their own exemption)

- qualifying child cannot have a qualifying child

- a qualifying child cannot claim EIC with a qualifying child
- a qualifying child cannot claim EIC without a qualifying child

- a dependent cannot claim EIC without a qualifying child

The adult female partner (grandmother) is a dependent, but she's not a qualifying child. She's his qualifying relative. There is no reason she cannot claim EIC with a qualifying child.

Don't forget that even a dependent qualifying child can still claim the Additional Child Tax Credit, using Form 8901, if they have a qualifying child...

There are different rules for each credit, and a different definition of qualifying child for each credit. But in the fact pattern described, Additional Child Tax Credit wouldn't come into play because the income isn't high enough.

See my other post called "EIC Puzzle."

BMK