“Yes, I know I don’t normally post on Saturday. but . . .”

WHO GETS THE DEPENDENCY EXEMPTION?

Earlier in the week I was presented with a tax scenario in a comment by a “reader” to an earlier post.

The scenario was originally presented as follows –

A husband and wife adopt the children of the wife’s deceased brother. Thus the children go from being the couple’s nieces to their own children. Can the wife’s son, who is 32 yrs old and lives in the household with his mother and the two small children, claim the children on his tax return? Although the home is a mobile home owned by the wife/mother? Although he can’t prove he provided any financial support to the children? Yes he can, but find a way on Turbo Tax to give the advice.

The author of the comment, who identified himself as an Enrolled Agent (EA) and admitted to being employed by H+R Block, was attempting to explain that tax preparation from a “box” (i.e. tax software such as Turbo Tax) is worthless, as it won’t advise you how to handle specific complicated tax situations.  And he is correct; software can’t give you advice on tax law.

Based on the above limited and incomplete information in the example the correct answer to the basic question “can the son claim the children” should have been – “it depends”.  Obviously more specific details were needed to properly answer the question.  However my first reaction, again based on the limited information provided, was that the son could not claim the children.  They would be more properly claimed by the adopted parents.

More information was subsequently provided on the scenario -    

The children’s natural father died in 2003.  He had received a commitment from his sister before his passing that she would always take care of his children.  He deemed the children’s natural mother to be unfit.  She was at the time of his passing and is still serving a term in prison. The children were legally adopted by the aunt and uncle in 2004.  They were age 5 and 10 in 2007.

The new adoptive father is 67 yrs old and is ill, and the wife was virtually unable to work during 2007.  Her total earnings were $1,250.  The mother/aunt and her first husband had a son, Michael, who is now 32 yrs old.  In 2006 the mother/aunt asked Michael to move in and help, and he did so in 2006.  He lived there for all of 2007.  Therefore, according to the author, in 2007 he is legally entitled to claim his “siblings”, and does not have to prove he provided any support. 

The author of the comment further states that the tie breaker rules only come into play if both the adoptive parents and son claimed the children as dependents.  The adoptive parents did not do so.  Michael, the “brother” of the children, had income of $27,000 for the year.  The author did not file him as Head of Household as he said “it would have been impossible to prove he provided 50%+ support of the household”.

This information changes things a bit.  There is now a case for allowing Michael, the adoptive mother’s son, to claim the adopted children as dependents on his tax return.

Let us address the issues in this scenario.  Here are the facts that have been presented –

1. The two children, age 5 and 10 in 2007, were legally adopted by their aunt and uncle in 2004.

2. Michael is the son of the adoptive mother, and the adopted children are now his half sisters.

3. Michael lived in his mother’s home for the entire year 2007.

4. The two adopted children also lived in the same home for the entire year 2007.

5. The adoptive father, Michael’s step-father, is 67 years old and, presumably, retired with no income.

6. The adoptive mother, Michael’s mother, had income of $1,250 for 2007.

7. Michael earned $27,000 for 2007.

8. The adoptive parents did not claim the children as dependents on their 2007 tax return. 

Let us now look at the rules for Exemptions for Dependents>Qualifying Child from IRS Publication 501 (Exemptions, Standard Deductions and Filing Information) -

“There are five tests that must be met for a child to be your qualifying child.  The five tests are:

1. Relationship,

2. Age,

3. Residency,

4. Support, and

5. Special test for qualifying child of more than one person.”

In the scenario as it pertains to Michael –

1. Relationship – To meet this test, a child must be:

a. Your son, daughter, stepchild, foster child, or a descendant (for example, your grandchild) of any of them, or

b. Your brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant (for example, your niece or nephew) of any of them.

The children are Michael’s half sisters – so they pass this test.

2. Age – To meet this test, a child must be:

a. Under age 19 at the end of the year,

b. A full-time student under age 24 at the end of the year, or

c. Permanently and totally disabled at any time during the year, regardless of age.

The children are age 5 and 10, so they pass this test.

3. Residency – To meet this test, your child must have lived with you for more than half of the year. There are exceptions for temporary absences, children who were born or died during the year, kidnapped children, and children of divorced or separated parents.

The children lived with (in the same home as) Michael for the entire year – so they pass this test.

4. Support – To meet this test the child cannot have provided more than half of his or her own support for the year.

No information has been provided to the contrary, so we assume they pass this test.  Notice the support test does not require Michael to provide more than half of the children’s support – it only asks if the children themselves provided more than half of their own support.

5. Special test for qualifying child of more than one person –

Sometimes, a child meets the relationship, age, residency, and support tests to be a qualifying child of more than one person. Although the child is a qualifying child of each of these persons, only one person can actually treat the child as a qualifying child. To meet this special test, you must be the person who can treat the child as a qualifying child.

If you and another person have the same qualifying child, you and the other person(s) can decide which of you will treat the child as a qualifying child. That person can take all of the following tax benefits (provided the person is eligible for each benefit) based on the qualifying child.

·         The exemption for the child.

·         The child tax credit.

·         Head of household filing status.

·         The credit for child and dependent care expenses.

·         The exclusion from income for dependent care benefits.

·         The earned income credit.

The other person cannot take any of these benefits based on this qualifying child. In other words, you and the other person cannot agree to divide these tax benefits between you.

The children meet the various tests to be a qualifying child of both their adoptive parents and Michael.  The adoptive parents have chosen not to treat the children as their qualifying children and do not claim them as dependents on their tax return.  This test is passed.

So it appears that Michael can claim the children as dependents on his tax return, as the author of the scenario has stated.

However, there is still some missing information.  Is there more income coming into the household or is it just the $27,000 from Michael and the $1,250 from his mother?    

Given the fathers age he is certainly drawing Social Security.  Is he also receiving a pension?  I expect the adoptive mother is receiving Social Security “in care of” the children (they are getting SS checks from their natural father’s SS account).  This is treated as income of the children and could possibly affect the issue of whether they provide more than half of their own support.  Is the mother the same age as the father?  If so, she might also be receiving Social Security.     

I expect, that with possibly four SS checks going into the household this is why, according to the comment author, “I did not file him as Head of Household because it would have been impossible to prove he provided 50%+ support of the household”.

I have to wonder what other information is missing in our scenario.  The bottom line to this post is – To make a truly informed determination it is necessary to know all the facts and circumstances of the individual situation.

I thank the EA from H+R Block for providing us with an interesting scenario.

Thanks to a fellow tax blogger for assistance with this post.

Yes, this post was co-written.