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Individual Tax

Married Couple Denied Dependency Exemption and Tax Credits

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

The Tax Court, in a summary opinion, denied a married couple child tax credits and dependency deductions for three children. The couple and the children did not have a qualifying relationship. The court also denied a dependency deduction for the wife’s father because his income was too high.

Background

Before the enactment of the Tax Cuts and Jobs Act (TCJA, PL 115-97), a taxpayer could claim a dependency exemption deduction with respect to an individual who was either a “qualifying child” or a “qualifying relative”. (Code Sec. 151(c), Code Sec. 152(a)) If the exemption was claimed for a qualifying child and other requirements were met, the taxpayer could also claim a refundable $1,000 tax credit per qualifying child. (Code Sec. 24(a))

A qualifying child is an individual:

  1. Who has a qualifying relationship with the taxpayer,
  2. Has the same principal place of abode as the taxpayer for more than half of the tax year,
  3. Meets certain age requirements, and
  4. Has not provided more than one half of his or her own support for the year. (Code Sec. 152(c)(1))

To have a qualifying relationship, the child must be either:

  1. A child of the taxpayer or a descendant of such a child, or
  2. A sibling or step-sibling of the taxpayer, or a descendant of the sibling or step-sibling. (Code Sec. 152(c)(2))

A qualifying relative is an individual:

  1. Who has a qualifying relationship with the taxpayer,
  2. Whose gross income is less than the exemption amount,
  3. For whom the taxpayer has provided more than one half of the individual’s support, and
  4. Who is not a qualifying child of the taxpayer or any other taxpayer. (Code Sec. 152(d)(1))

One qualifying relationship under this section is father of a taxpayer. (Code Sec. 152(d)(2)(C)) Another qualifying relationship is an individual who was not the taxpayer’s spouse, had the same principal place of abode as the taxpayer during the tax year, and was a member of the taxpayer’s household during that year. (Code Sec. 152(d)(2)(H))

Facts

Taxpayers, a married couple, lived with the wife’s father at all relevant times. The taxpayers were both employed and were also pastors of their own church.

The taxpayers befriended Ms. X who had three children, all under age 10. The taxpayers took Ms. X’s children into their home when Ms. X became homeless. Ms. X picked up the children and took them to school and returned them to the taxpayers’ home afterward but other than that, the taxpayers provided all transportation for the children. The taxpayers also provided most of the housing, utilities, food, and clothing, for the three children.

The wife’s father also lived with the taxpayers. He suffered from dementia and problems with his kidney and liver. He received $8,796 per year from Social Security. The taxpayers provided most of his housing, utilities, food, clothing and transportation.

At the request of the children’s mother, the taxpayers claimed the children as dependents on their 2012 income tax return. They also claimed the wife’s father. The tax return preparer used by the taxpayers listed the children’s relationship to the taxpayers as “nephew” or “niece”. As a result, the taxpayers obtained a refund for that year. They gave a portion of the refund to the children’s mother, who used the money to obtain housing for herself and her children.

Tax Court Denies Exemption and Credits

The Tax Court ruled that the children did not have one of the specified relationships with the taxpayers; therefore, they were not qualifying children and the taxpayers could not claim the child tax credits. And, since the children were not qualifying children, the taxpayers could not claim dependency exemptions for them.

The Tax Court also determined that the children were not qualifying relatives because the taxpayers did not provide any evidence beyond their own testimony (such as the mother’s release of her claim to the dependency exemptions for the children) that the children were not their mother’s qualifying children.

Finally, the wife’s father’s Social Security income was more than the annual exemption amount for 2012; therefore, he did not qualify as the taxpayers’ qualifying relative and they could not claim him as a dependent.

To continue your research on what constitutes a “qualifying child” for purposes of the dependency exemption, see FTC 2d/FIN ¶A-3605.2; United States Tax Reporter ¶1524. For discussion of what constitutes a “qualifying relative” for purposes of the dependency exemption, see FTC 2d/FIN ¶A-3606; United States Tax Reporter ¶1524.

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