The Q Word

February 10, 2014

Comments and Advice to Help Improve the Tax Returns That We Prepare

Tax law is tricky. Printing should be the easy part. - Barbara DelBene Saturday, February 8, 2014

NONDEPENDENTS
Tax law is tricky. Its complex, and can be counterintuitive and confusing. The rules for qualifying child and qualifying relative are perfect examples. Some of it is fairly straightforward, but you do run into the nonsensical: a qualifying relative that does not have to be related, a uniform definition of qualifying child that is not really uniform, rules about splitting children, and the confounding term nondependent. These kinds of concepts can cause confusion and, moreover, errors on tax returns. Heres a heads up on four of these issues. Uniform Definition of Qualifying Child - Ha! When the Working Families Tax Relief Act of 2004 was passed, there was much hoopla about the fact that the new rules for qualifying child were uniform for five different tax benefits. But upon looking at the details there are, of course, substantial differences that render them not uniform at all. The attached charts provide a useful summary that reveals many of the differences in the definitions. Please realize that these charts are just a summary. Refer to research materials for more details. Example: A single client lists four kids on her intake sheet who she supported and who lived with her all year: Max, age 18, Eleanor, age 15, Frederick, age 10, and Harvey, age 4. Her adopted child, Frederick, has an ITIN; everybody else has an SSN. Although he lived with her all year, Harvey is not her child. She is taking care of Harvey for a friend while the friend is in rehab and recovery. What do these kids qualify for? EITC dependent child tax credit head of hshld child care credit Max 18 Yes Yes No Yes No Eleanor 15 Yes Yes Yes Yes No Frederick 10 No Yes Yes Yes Yes Harvey 4 No Possibly No No Possibly

Unrelated Qualifying Relatives This doubletalk concerns the qualifying relative rule called relationship/member of household. To be a dependent under the qualifying relative rules, the person must be related to the taxpayer or lived with the taxpayer for the entire year. Remember! A qualifying person for head of household does have to be related.

The Q Word National Community Tax Coalition

February 10, 2014

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Example: Johns former college roommate, Tony (age 32), lost his job and moved in with John in December, 2012. Tonys still there. John provided all of Tonys support. Tony is single and has no income; he watches TV and receives packages for John. Even though Tony is not related to John, he could be his dependent for tax year 2013. But John cannot use Tony to claim head of household. Nondependents A nondependent, code 0 on the TaxWise Main Information Sheet, can occur in a couple of ways. When a child provided more than half of his/her own support, that child is not a qualifying child for dependency exemption, child tax credit, head of household, or child care credit. But that child is a qualifying child for EITC. Remember! Unless the child is married, support does not matter for EITC. Example: Bill, age 56, lived with his brother Ted, age 52. They are both single. Bill is totally and permanently disabled. He received social security disability, which he used to provide most of his support. Ted cannot claim Bill as his dependent or for head of household. However, he can claim Bill as his qualifying child for EITC. Remember! Age of the child does not matter if that child is disabled. When a divorced parent has custody of the children, she can choose to sign Form 8332 to let dad claim them as dependents and for child tax credit. If they otherwise qualify, she can claim them on her return for EITC, head of household, and the child care credit. Remember! EITC always goes to the person that the child lived with. Example: Frieda and Quincy were divorced in 2010. The divorce decree did not address tax issues. All three kids lived with Frieda for all of 2013. Frieda has decided to let Quincy claim the kids for 2013 and gave him the signed Form 8332. Assuming that other qualifications are met, Frieda can claim the kids as nondependents, code 0, for EITC, head of household, and child care credit. Splitting Children After reading the Frieda and Quincy example, you may be thinking: But isnt there a rule that says that you cant split children between two tax returns? The taxpayer must claim the child for everything or nothing, right? There is a rule that says when a child is the qualifying child of more than one person, its an all or nothing deal. The important point is that before that restriction applies, the child must be the qualifying child of more than one person. In the Frieda and Quincy example, the children were not Quincys qualifying children because they didnt live with him. So the nosplitting rule didnt apply. Example: Francine, age 28, and her nine-month-old baby, Leon, lived with Francines mother Betty, age 53. Francine is not disabled and Leon provided none of his own support, Look at the qualifying child requirements: age, relationship, residency and support. Leon is Francines qualifying child. He is also Bettys qualifying child. Now we have the applicable situation: little Leon cannot be split. If Francines income is more than Bettys income, only Francine can claim Leon. If Bettys income is more than Francines income, either Francine or Betty can claim Leon. They choose. But he can only go on one return.

The Q Word National Community Tax Coalition

February 10, 2014

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The Q Word is written to provide commentary, information, opinions and observations from a grass roots perspective to all preparers, managers, and coordinators that are involved in free income tax preparation programs. If you have any suggestions for the Q Word, or would just like to submit comments, questions, praise, or bitter criticism, please e-mail: Barbara DelBene at bdelbene@tax-coalition.org

All Those Kids

TAX YEAR 2013

Age At the end of the tax year, the child must be under 19, under age 24 if a full time student, and must be younger than the taxpayer. The child can be any age if the child is disabled. At the end of the tax year, the child must be under 19, under age 24 if a full time student, and must be younger than the taxpayer. The child can be any age if the child is disabled. Child must be under age 17 at the end of the year and must be younger than the taxpayer. Note: There is no exception for students or the disabled. At the end of the tax year, the child must be under 19, under age 24 if a full time student, and must be younger than the taxpayer. The child can be any age if the child is disabled. Child must be under age 13 or disabled at the time of the child care.

Relationship Child must be taxpayer's child, stepchild, adopted child, foster child, sibling, step sibling, or descendent of any of these. If the taxpayer is not the child's parent, special restrictions may apply. Child must be taxpayer's child, stepchild, adopted child, foster child, sibling, step sibling, or descendent of any of these. If the taxpayer is not the child's parent, special restrictions may apply. Child must be taxpayer's child, stepchild, adopted child, foster child, sibling, step sibling, or descendent of any of these. If the taxpayer is not the child's parent, special restrictions may apply. Child must be taxpayer's child, stepchild, adopted child, foster child, sibling, step sibling, or descendent of any of these. If the taxpayer is not the child's parent, special restrictions may apply. Child must be taxpayer's child, stepchild, adopted child, foster child, sibling, step sibling, or descendent of any of these. If the taxpayer is not the child's parent, special restrictions may apply.

Residency Child must live in the U.S. with the taxpayer for more than half the tax year. Some temporary absences count as time lived at home. Child must live with the taxpayer for more than half the tax year. Some temporary absences count as time lived at home. Child must live with the taxpayer for more than half the tax year. Some temporary absences count as time lived at home. Child must live with the taxpayer for more than half the tax year. Some temporary absences count as time lived at home. Child must live with the taxpayer for more than half the tax year. Some temporary absences count as time lived at home.

Support No support test. Exception: Married child cannot provide over 1/2 of his/her own support for the tax year.

Earned Income Tax Credit

Child did not provide over 1/2 of his/her own support for the tax year.

Dependency Exemption

Child Tax Credit

Child did not provide over 1/2 of his/her own support for the tax year. Note: Child must also be claimed as the taxpayer's dependent.

Head of Household

Child did not provide over 1/2 of his/her own support for the tax year. Note: Taxpayer must provide over half the cost of maintaining the home. Child did not provide over 1/2 of his/her own support for the tax year.

Child Care Credit

Warning! This chart is a summary. Please refer to Publication 17, Your Federal Income Tax; Publication 4012, VITA Resource Guide; or other resource
material for all eligibility rules.

All Those Kids-Part 2

TAX YEAR 2013

Child must have SSN (not ITIN)?

Exception for divorced/separated parents can be used?

Qualifying relative rules can be used to get or increase this benefit?

A disabled child can be any age?

Can the taxpayer be a qualifying child?

Citizenship

EITC

yes

no (The child must live with the taxpayer.)

Child must be US citizen or a legal resident of the US. no yes no

Dependent

no

yes

yes

yes

no

Child must be US citizen or a resident of the US, Canada or Mexico.

Child Tax Credit

no

yes

no

no

no

Child must be US citizen or a resident of the US at some time during the tax year.

Head of Household

no

no (The child must live with the taxpayer.)

yes (Must be dependents that are related.)

yes

yes

Child must be US citizen or a resident of the US, Canada or Mexico.

Child Care Credit

no

no (The child must live with the taxpayer.)

yes (Certain disabled dependents)

yes

yes

Child must be US citizen or a resident of the US, Canada or Mexico.

Warning! This chart is a summary. Please refer to Publication 17, VITA Resource Guide 4012, or other resource material

Qualifying Relatives (QR)

TAX YEAR 2013

Cannot be Qualifying Child

Relationship

Residency

Support

Income

EITC

Note: Qualifying Relative rules do not apply.

Dependency Exemption

QR is not a qualifying child of another taxpayer who has a filing requirement or claims EITC.

QR is a descendent, sibling, ascendant, niece/nephew, in-law; OR lives with the taxpayer all year.

If the QR is not related to the taxpayer, QR must live with the taxpayer all year. If the QR is related there is no residency requirement.

The taxpayer provided over half of the QR's financial support for the tax year. Exception: multiple support agreements.

QR had income less than $3,900.

Child Tax Credit

Note: Qualifying Relative rules do not apply.

Head of Household

QR is not a qualifying child of another taxpayer who has a filing requirement or claims EITC.

QR is a descendent, sibling, ascendant, or niece/nephew, in-law.

QR lived with the taxpayer more than 6 months of the tax year. Exception: a taxpayer's parent is not required to reside with the taxpayer. QR must live with the taxpayer more than 6 months of the tax year.

Child and Dependent Care Credit

QR is not a qualifying child of another taxpayer who has a filing requirement or claims EITC.

QR is a descendent, sibling, ascendant, niece/nephew, in-law; OR lives with the taxpayer all year.

The taxpayer provided over half of the QR's financial support for the tax year. Note: Also, the taxpayer must pay more than half the cost of maintaining the home. The taxpayer provided over half of the QR's financial support for the tax year.

QR had income less than $3,900.

There is no income test.

Warning! This chart is a summary. Please refer to Publication 17, VITA Resource Guide 4012, or other resource material.