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families & tax

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Imagine this: Your ex-spouse insists on claiming your child as a dependent without your consent. What do you do? A Princeville, Illinois, mom responded to this tax “emergency” by calling the police. 

According to the Journal Star, the woman called the Peoria County Sheriff’s Office on February 6 to report “possible tax fraud.” The woman claimed that she had the right to claim her teenaged son who lives with her as a dependent on her federal income tax return. However, when her return was bounced by the Internal Revenue Service (IRS) because the son had been claimed on another tax return, she assumed that her ex-husband must have claimed her son on his return. The ex-husband “had no right” to claim the child, she told the police.

The deputy tried to reach the woman’s ex-husband but was not able to do so. The deputy advised the woman to report the matter to the IRS.

While the deputy was clearly trying to smooth things over, calling the police to report a tax problem isn’t appropriate even if you think that you have an actual “tax emergency.” It’s a civil issue—not a criminal one—and the best way to resolve a tax issue is through the IRS, potentially using the services of a tax professional. When it comes to divorce and support-related tax issues, you may also want to call your divorce attorney since tax and dependent issues are generally included in divorce and custody settlements. 

For federal income tax purposes, a dependent is either a qualifying child or a qualifying relative. Generally, a dependent must be a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico; have a valid tax ID number; and be either your qualifying child or your qualifying relative.

Your child isn’t necessarily a qualifying child. A person is your qualifying child if that person meets all of these tests:

  • Relationship test. The child must be your child, stepchild, adopted child, foster child, brother or sister, or a descendant of one of these.
  • Residence test. The child must have the same residence as you for at least half of the tax year.
  • Age test. The child must be under age 19 at the end of the tax year; under age 24 and a full-time student for at least five months out of the year; or totally and permanently disabled.
  • Support test. The child must not have provided more than half of his or her own support during the tax year.
  • Return test. The child, if married, must not have filed a joint return with his or her spouse.

(If you take care of someone who is not your qualifying child, you still may be able to claim that person as a dependent if he or she is a qualifying relative. You can read more about who is a qualifying relative for the new $500 credit for dependents here.)

So why does dependency matter for federal income tax purposes? Before 2018, you could deduct a personal exemption amount of about $4,000 for each dependent on your federal income tax return. That exemption amount reduced taxable income: the more dependents, the larger the potential deduction (it was really an exemption, but it acted like a deduction). 

The Tax Cuts and Jobs Act (TCJA) reduced the personal exemption amount to zero. Claiming a dependent may still carry tax benefits on your tax return, however, including the ability to claim the child tax credit. You can read more about the expanded child tax credit for 2018 here.

For child tax credit purposes, a child of divorced or separated parents will typically be a qualifying child of the custodial parent. However, you can alter that rule by agreement. Specifically, if you sign a form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent (downloads as a PDF), you can agree to allow the noncustodial parent to claim the dependency exemption. That means that you won’t be entitled to the child tax credit; the noncustodial ex-spouse will get to claim the credit. To get the credit back, you’ll need to revoke the form (you can do this for future years directly on the form at Part III).

(Some additional caveats and exceptions apply. Since divorce and custody situations can be tricky and very family-specific, I recommend checking with your divorce attorney if you have questions.)

Parents may also want to claim a child as a dependent for purposes of the Earned Income Tax Credit (EITC). The EITC can result in a hefty tax refund, even if you have no tax liability, but only one person can claim the same child. If more than one person claims the same child, the IRS will apply the so-called tiebreaker rules (you can read them here).

Confused? You’re not alone. The rules for dependents are not always easy to understand, especially in divorce and custody situations. Even parents with the best of intentions can get them mixed up. And parents who don’t have the best of intentions? The result can be frustrating enough to make you want to call 911. But don’t. If you’re tempted to reach for the phone to resolve a tax problem, try 1.800.829.1040 (that’s the IRS).

Taxpayer asks:

Dear Taxgirl:

I am married and due to my husband’s tax debt, we file as married filing separately.  I bought a house recently in my name only that we live in together, and he pays 1/2 of all house expenses.  Is this considered income to me?  The state we live in is Illinois.

Taxgirl says:

If you file as married filing separately, that means that you are reporting only your income and claiming only your deductions; your spouse’s income and expenses are reported separately.

Splitting household expenses happens all of the time and for all kinds of reasons (we do it in my family, too). Typically, since household expenses are personal in nature and are not deductible, there’s no corresponding income. So, from a federal income tax perspective, your spouse’s payments to you to help cover household expenses are tax neutral – in other words, no harm, no foul.

One quick caveat: You didn’t specifically reference a mortgage but if you do have a mortgage, the ownership and payment rules still apply for purposes of any home mortgage interest deduction. Also, remember that when you file separate returns, you and your spouse must both claim the standard deduction or both of you must itemize your deductions (you can’t itemize while your spouse claims a standard deduction).

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Parents like me could be in store for a surprise this year. The new tax law, the Tax Cuts and Jobs Act, has a few changes for parents and those who claim dependents.

First, there are no more personal exemptions. Personal exemptions used to decrease your taxable income before you determined your tax. You were generally allowed one exemption for yourself (unless you could be claimed as a dependent by another taxpayer), one exemption for your spouse if you filed a joint return, and one personal exemption for each of your dependents.

The personal exemption amount for 2017 was $4,050. That means, for a family of five like mine, the personal exemption amount would have topped $20,000 last tax year. This would have been in addition to the standard deduction, or the itemized deductions, depending on your circumstances.
There is no personal exemption amount for 2018. The standard deduction, however, has been increased: $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly and surviving spouses. The boost in the standard deduction should make up for some of the loss of the exemption amounts, but here’s a quick check on the math.

In 2017, a family of three (filing jointly) who claimed the standard deduction, would have claimed three exemptions (3 x $4,050) and the standard deduction amount of $12,700, reducing taxable income by $24,850. In 2018, a family of three (filing jointly) would only be entitled to the standard deduction of $24,000.

Consider how more dependents change that picture: A family of five (filing jointly) who claims the standard deduction would have claimed five exemptions (5 x $4,050) and the standard deduction amount of $12,700 in 2017, reducing taxable income by $32,950. In 2018, a family of five (filing jointly) would only be entitled to the standard deduction of $24,000. That’s a big difference.

However, it would be a mistake to stop the tax analysis there. In addition to a shift in the tax rates, there may be other tax breaks available. The Child Tax Credit remains in place and may be worth as much as $2,000 per qualifying child depending upon your income – that’s twice as much as before.

In prior years, the Child Tax Credit was nonrefundable, which means that if the available tax credit exceeded your tax liability, your tax bill was reduced to zero. Even if you were able to claim the entire $1,000 per child (the maximum available credit at the time), if you didn’t have any tax liability, you couldn’t benefit. The credit disappeared.

(You can find out more about the older version of the nonrefundable Child Tax Credit, and the former Additional Child Tax Credit which was refundable, here.)

Now, the Child Tax Credit is worth up to $2,000 per child and includes a refundable piece of up to $1,400. A refundable credit means that you can take advantage of the credit even if you do not owe tax. Unlike with a nonrefundable credit, if you don’t have any tax liability, the “extra” credit is not lost but is refunded to you. To claim the refundable portion, which is equal to 15% of your earned income which exceeds $2,500 up to the maximum credit, you must have earned income (generally, wages, salary, tips, or net earnings from self-employment).

The credit is limited if your modified adjusted gross income (MAGI) is over a certain amount. For married taxpayers filing a joint return, the phase-out begins at $400,000 and is $200,000 for all other taxpayers (there is no separate threshold for heads of household). Phase-outs means that the credit is reduced as your income increases. In this case, the reduction is $50 for each $1,000 by which your MAGI exceeds the threshold amount.
(For more on MAGI, click here.)

The child credit also includes a $500 non-refundable credit called the Credit for Other Dependents, sometimes referred to as the “family credit.” This allows you to claim a credit for dependents in your household that don’t meet the definition of qualifying child.

Why the new credit? Remember the loss of personal exemptions? The new credit is intended to make up for the fact that you no longer have the ability to claim other dependents like your parents as personal exemptions. It may also include dependent children who are age 17 or older at the end of 2018, like those college students still in your house. For purposes of the additional credit, the definition of dependent still generally applies.
Clearly, these changes can affect your tax bill for the 2018 tax year. The Internal Revenue Service (IRS) encourages families to check their tax liabilities and make adjustments as necessary. By plugging your tax data into the withholding calculator on the IRS website, you can do a “paycheck checkup” to make sure that you’re on the right track.

You can find the new withholding calculator on the IRS website here. To use the calculator, you’ll need your most recent pay stub from work, as well as a completed copy of your last year’s tax return.

If you need to make a change to your withholding, you’ll do so using a form W-4. You don’t send the form W-4 to the IRS: You submit it to your employer. Your employer will adjust your withholding accordingly. For more on how to figure out your form W-4 under the new law, click here.

I’ve been asked a lot of questions about the expanded Child Tax Credit under the new tax reform law. While we have a sense of how it should work under the existing rules for the Child Tax Credit, there are still some aspects of the new law that aren’t quite obvious. We’ll have to wait for the Regs for the details (typically once Congress passes a law, the Internal Revenue Service (IRS) issues Regulations which offer an interpretation of the statute) but here’s what you need to know.

Under tax reform, the Child Tax Credit may be worth as much as $2,000 per qualifying child depending upon your income – that’s twice as much as before. A qualifying child for this credit must meet all of the following criteria:

  • The child must be under age 17 – age 16 or younger – at the end of the tax year.
  • The child must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always considered your own child.
  • The child must not have provided more than half of their own support.
  • You must claim the child as a dependent on your federal tax return.
  • The child must be a U.S. citizen, U.S. national, or U.S. resident alien and you must provide a valid Social Security number (SSN) for the child by the tax return due date.
  • The child must have lived with you for more than half of the tax year (some exceptions apply).

In prior years, the Child Tax Credit was nonrefundable which means that if the available tax credit exceeded your tax liability, your tax bill was simply reduced to zero. So even if you were able to claim the entire $1,000 per child (the maximum available credit for the 2016 tax year), if you didn’t have any tax liability, you couldn’t benefit from the credit. The credit would not carry forward to any future years, or back to any past years: it simply disappeared.

Under tax reform, part of the Child Tax Credit remains nonrefundable but the “old” Additional Child Tax Credit, which was refundable, has essentially been merged into the new credit. I know that sounds confusing but what it means is that the Child Tax Credit is just one credit worth up to $2,000 per child and includes a refundable piece of up to $1,400 per child. To be clear, the $1,400 refundable piece is included as part of the $2,000 Child Tax Credit and is not an additional credit (unlike before).

A refundable credit means that you can take advantage of the credit even if you do not owe any tax. Unlike with a nonrefundable credit, if you don’t have any tax liability, the “extra” credit is not lost but is instead refunded to you. To claim the refundable portion, you must have earned income (generally, wages, salary, tips, and net earnings from self-employment). For purposes of the new Child Tax Credit, the refundable portion is equal to 15% of your earned income which exceeds $2,500 up to the maximum credit.

Let’s do the math. Say your earned income is $10,000 and let’s assume that you are entitled to the entire $2,000 credit. However, at that income level, you likely don’t owe any tax. With a nonrefundable credit, that wouldn’t mean anything to you. However, with the refundable piece of the credit, you can pocket up to $1,125 since $10,000 (your earned income) less $2,500 x 15% = $1,125.

What if, instead, your earned income was $50,000 and your tax owed was $5,000? You would be entitled to the entire $2,000 nonrefundable credit – no need to do the math on the refundable piece. A nonrefundable credit reduces what you owe, it just can’t reduce your liability below zero. So after you apply the $2,000 credit, your tax liability is reduced to $3,000. Easy, right?

But what if you had already paid $5,000 as withholding? Do you lose the credit or the withholding? NO. Don’t read too much into the word “nonrefundable” – it only means you can’t reduce your tax burden below zero but it doesn’t negate an overpayment. Think of nonrefundable credits as tax reductions and refundable credits as payments – that’s more or less how they appear on your form 1040.

If you have three or more qualifying children, you can use an alternative formula to determine the refundable portion. Under the alternative formula, the refundable portion is equal to the amount by which your Social Security taxes (those taken out of your wages or paid out as self-employment taxes) exceed your earned income credit (sometimes called EIC or EITC).

The credit is limited if your modified adjusted gross income (MAGI) is above a certain amount. The amount at which this phase-out begins varies depending on your filing status. For married taxpayers filing a joint return, the phase-out begins at $400,000 and it is $200,000 for all other taxpayers (note there is no separate threshold for HOH). Phase-outs means that the credit is reduced as your income increases. In this case, the reduction is $50 for each $1,000 by which your MAGI exceeds the threshold amount.

Here’s a quick example of how the phase-outs would work. Let’s assume that as a single taxpayer, you are entitled to a credit of $2,000 but your income is above the $200,000 threshold: it’s $201,000. Your credit would be reduced by $50 (because you’re $1,000 over the threshold amount) so that your available credit is $1,950.

As your income climbs, the credit disappears completely. So, as a single taxpayer making income over $240,000, your credit is reduced by $2,000, bringing the available credit to zero (40 x $50 = $2,000).

Under tax reform, the child credit also includes a $500 non-refundable credit for qualifying dependents other than qualifying children. This has been referred to as a “family credit” and allows you to claim a credit for other dependents in your household that don’t meet the definition of qualifying child. The credit is clearly intended to make up for the fact that you no longer have the ability to claim other dependents like your parents on your tax return as personal exemptions since those have been eliminated. For purposes of the additional non-refundable “family” credit, the definition of dependent still generally applies but there is no requirement to provide an SSN (you’ll still need a taxpayer ID number).

And I know that this version of tax reform was supposed to be about simplification but not when it comes to the Child Tax Credit. In order to claim the credit, you must file a federal form 1040, federal form 1040A, or a federal form 1040NR. You cannot claim the child tax credit using form 1040-EZ.

The modified credit is slated to remain in place for the 2018 through 2025 tax years.

Amy at PSU Field Hockey CampMy daughter is braving the summer heat in goalie pads today at field hockey camp. It was an early morning, loading equipment into the car and getting to registration on time but we know this drill by now. You may, too. If your family is anything like mine, with school out, summer becomes a whirlwind of summer camps – especially for working parents who depend on summer camp for child care.
Fortunately, expenses associated with summer camp may result in a tax break in the form of the child care credit so long as they are work-related. There are, however, some rules and restrictions (as if you expected any different). Follows are 12 tips for claiming summer camp expenses on your taxes:

  1. Overnight camp is fun for the parents but doesn’t qualify for the credit. Yeah, I enjoy a break away from the kids overnight as much as the next girl. But for tax purposes, the cost of sending your child to an overnight camp is not considered a work-related expense for purposes of the credit.
  2. Chess camp might be okay. Ditto for tennis camp or lacrosse. You get the idea… The cost of sending your child to a day camp may be a qualifying expense, even if the camp specializes in a particular activity. You’re not required to choose the cheapest childcare option (not that you have to seek out the most expensive, either, since the credit is limited) so feel free to send your kid to the geekiest, sportiest, most dramatic, most artsy camp you want.
  3. The forms matter. To claim a credit for child care expenses, you’ll need to attach a federal form 2441 to a federal form 1040, federal form 1040A, or form 1040NR. You cannot file a federal form 1040EZ or federal form 1040NR-EZ (all forms download as a pdf) and claim the credit.
  4. Stay at home and unemployed spouses make you ineligible for the credit. I know, I know, this is unpopular. But it is what it is. The child care credit is classified for tax purposes as “work-related.” To qualify, you must pay child and dependent care expenses so that you and (not or) your spouse, if married, can work or look for work. However, if you don’t find a job or if you don’t have any earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment for the year, you may not claim the credit.
  5. As much as I’d love for you to, you can’t pay for my kids to go to camp and claim the credit. For tax purposes, expenses that you pay for summer camp must be for a child considered a “qualifying person.”  In most cases, this means your dependent child under the age of 13 (some exceptions apply). It may be appealing to ship off your neighbor’s kids, your best friend’s kids – or those of your favorite tax attorney – for the summer but those expenses won’t count for purposes of the credit.
  6. Haul out that Social Security card. To claim the credit, you must include your child’s name and Social Security number. I’ll be the first to admit that I haven’t memorized the Social Security numbers for all of my kids, but I know where to look for them. You should, too. If you don’t have this information on your return, you may lose the credit.
  7. Summer camp isn’t the same as setting up a tent in your backyard. Summer camp isn’t the same as setting up a tent in your backyard and calling it Camp Erb. You have to make payments to an actual child care provider who will be identified on your tax return by name, address, and bona fide tax ID number. So, yes, that means paying above the table and reporting those payments appropriately. Also, your summer camp provider cannot be your spouse, your qualifying child’s parent or your dependent; if the provider happens to be your child, he or she must not be claimed as your dependent and must also be at least 19 years old by the end of the year.
  8. Almost everything that you bought to send your kid to camp is non-deductible. Don’t shoot the messenger on this one. I know that stocking up for summer camp – especially sports camps – can be expensive. But most of those expenses, including sports equipment (even if it’s required), clothing (even if those are clothes, like hockey shorts, that your child would never, ever wear outside of camp), and fans and furniture for overnight camp are personal in nature and not deductible.
  9. Notwithstanding #8 immediately above, some of the expenses involved in simply getting ready for camp are deductible. That includes physicals (you do not have to be sick for a physical or well exam to be deductible); shots (vaccines and immunizations are considered preventative care and are deductible); and fees for doctors to complete forms for camp. If those are part of your medical care, they are deductible. Remember that medical expenses are deductible only if you itemize on a Schedule A and only to the extent that the total medical expenses paid during the year exceed 10% of your adjusted gross income (AGI): Sked A(For more on medical expenses, check out this post).
  10. Changing your mind is okay but won’t result in a tax break. Nobody signs up for summer camp in summer. If you follow me on Twitter @taxgirl, you know I complain about this every year. It’s like applying for college: you have to start early. Many camps start filling up in January, so you have to send in deposits early. If your schedule changes or if you find a place your child likes better, that’s okay, but any money that you may lose because you’ve put it down as a deposit won’t qualify as a childcare expense. Similarly, if you pay in full for camp early, you can’t include the cost as a child care expense until the childcare is received.
  11. It’s not a donation if your kids don’t actually go to camp. What if you change your mind – as mentioned above – and your child doesn’t go, and the payment is already made to a charitable organization (like the YMCA or church)? If the payment is not refundable, that doesn’t change anything: you can’t re-characterize it after the fact. Money is lost, a lesson is learned. But if the payment is refundable and you choose to redirect it (meaning you tell the organization to keep it and use it as a donation), you may be able to re-classify the payment as a charitable donation. If that’s the case, get a receipt: the normal rules for charitable donations apply.
  12. Getting there may be half the fun but likely not a qualifying expense. If there are transportation costs associated with summer camp – whether by bus, subway, taxi or car – the costs may qualify as an expense for purposes of the credit if the camp takes the child to or from the place where the child care is provided. However, the costs that you spend on your own transportation to get your child to summer camp will not qualify as an expense for purposes of the credit.

This list is meant to be a quick and dirty reference. This is tax, after all, so other limitations, exceptions, and restrictions may apply. If you have specific questions or circumstances that might be a little out of the ordinary, be sure to check with your tax professional for more details.
But assuming you meet the criteria, including summer camp expenses for purposes of the child care credit can save you money come tax time. Credits are dollar for dollar reductions in the amount of tax payable which means that they can make a fairly significant dent in your tax bill; in comparison, deductions are simply reductions in your taxable income.
The non-refundable child care credit can be up to 35% of your qualifying expenses, depending upon your adjusted gross income (AGI). Your total expenses must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from your income. The maximum amount of expenses used to calculate the credit for the year is $3,000 for one child or $6,000 for two or more children. Note that the $6,000 doesn’t have to be divided up equally for the kids, so if dinosaur camp costs a little more than art camp, you can add up the two as opposed to pro-rating them (yes, there’s such a thing as dinosaur camp).
Of course, there are still no tax breaks for slip ‘n’ slides, water balloons or lightning bug jars but be sure to include those things in your plans anyway. Enjoy your kids – and your summer!

Q is for QDRO

Divorce is never easy. Whether it’s amicable, contentious, or a “conscious uncoupling” a la Gwyneth Paltrow and Chris Martin, there are still issues to work out which could include support, child custody, and property distribution.

In particular, property distribution can be tricky when the assets in a marriage are held in unequal shares, are not liquid, or are not easily divisible. One of the assets that tend to touch on all three (equality, liquidity, and divisibility) is a retirement plan. Depending on the financial arrangements inside a marriage, it’s not unusual for one spouse to hold a retirement plan that constitutes a significant share of marital assets. Dividing that asset up could cause unfortunate tax consequences. Fortunately, there’s a provision in tax law that focuses on precisely this issue.

There is, however, a crucial concept to understand when thinking about the tax consequences of divorce – especially when it comes to retirement plans. More often than not, all tax provisions from alimony to asset division, are dependent on a valid judgment, decree, or order. It’s not enough to feel divorced, act divorced, or agree to be divorced. You must be actually divorced (or separated, depending on the issue and the state).

As part of your divorce settlement, you’ll likely want to seek out a QDRO, or qualified domestic relations order, to deal with the division of any retirement plan. A QDRO is not limited to asset distribution: it may also be used to satisfy an order of child or spousal support.

A QDRO is a judgment, decree, or order that assigns or retitles some or all of a retirement plan participant’s assets into another person’s name. Ordinarily, this kind of change in ownership would result in potentially negative tax consequences (for example, it could be treated as a distribution and fully taxable). But if properly drafted, a QDRO allows the former spouse the same kind of rights as if he or she had been the original participant in the plan. That would include the ability to roll over tax-free all or part of a distribution from a qualified retirement plan received under a QDRO.

It’s important to note that while a QDRO can preserve the character of a retirement plan, it does not change it. That means that actual distributions made as part of a QDRO would generally be taxed in the same manner as a regular distribution; one significant exception applies for cash payouts which are not subject to the early withdrawal penalty under a QDRO. But to be clear, a division of assets under a QDRO does not mean that the former spouse will receive a tax-free distribution from a retirement plan. The same tax attributes apply as before the transfer. Those tax consequences should be taken into consideration when determining the split at the time of the drafting of the QDRO – and not after.

In contrast to the treatment of a QDRO distribution to a former spouse, a QDRO distribution that is paid to a child or other dependent is taxed to the plan participant.

The IRS rules for QDROs are generally laid out at IRC Sec. 414(p) – but they’re not for the faint of heart. QDROs and divorce law can be complicated, so I highly recommend consulting with your tax professional when negotiating the terms of your divorce settlement.

When you’re a parent, you always say that you’ll be a parent forever. But do you really mean it? Is there a point – an age or an event – at which you plan to look your kids in the eye and say, “Enough is enough, now you’re on your own”?

There certainly was at my house growing up. My parents had a rule: after high school, you either went to school, joined the military, or got a job and moved out. I went to school and my two brothers joined the Navy.

That was, however, a different time. Increasingly, parents and the courts are rethinking whether age 18 – high school graduation age for most kids — should be the benchmark for financial and other independence.

That question was highlighted again this week 18-year-old Rachel Canning went to court to force her parents to pay her support. Rachel, an 18-year-old senior at Morris Catholic High School, has asked a judge to order her parents, Sean and Elizabeth Canning to pay support, private school tuition, medical and related bills, college expenses, and legal fees. According to court papers, Rachel alleges that her parents “abandoned her in the middle of the school year.”

Rachel’s parents, Sean Canning, a retired police chief, and Elizabeth Canning, a legal secretary, tell a different story. They claim that the teen was out of control and refused to abide by the rules. Problems with their daughter, they said, could be linked to her boyfriend, who “apparently has no supervision, was given an out-of-school suspension and had access to a car.” According to her parents, Rachel and her boyfriend had been suspended from school for posting inappropriate messages on social media and for skipping class and was removed as captain of the cheerleading squad for her behavior. Additionally, her parents claimed that she stayed out too late drinking during the school week, coming it at least once at 3:00 a.m. She left her mother voice messages called “vulgar” and was, her parents say, otherwise disrespectful. Rachel was given an ultimatum: follow the rules or leave. She left.

Rachel ended up at the home of her best friend, Jaime. Her friend’s father, John Inglesino, has since been supporting Canning and has advanced legal fees for Canning’s lawsuit. This week, the Cannings alleged that, with Inglesino’s aid, a bad situation has been made worse. The Cannings claim that the Inglesinos have “enabled” Rachel rather than encouraging her to come home.

Legally, Rachel’s case will focus on whether she is considered “emancipated” — which for legal purposes, means that she is not dependent on her parents. Age 18 is generally considered the age of majority in the Garden State and lawyers for the Cannings claim that no matter the age, their daughter declared herself emancipated by leaving home. If Rachel is not considered emancipated, the next focus would be whether her parents have a legal obligation to pay for private school (tuition at her school runs $12,700 per year) and other expenses, including college. Earlier this week, the judge denied Rachel’s request for an emergency order to pay outstanding private school tuition and college tuition, finding that there was not yet an “emergency.”

As that case continues to make headlines, another case was decided in New Jersey this week, establishing that a Rutgers University history professor will have to pay a portion of his daughter’s education at Cornell Law School.
Factually, this case is a bit different for two reasons: the child involved in the matter was over the age of 18 and the parents were divorced. James Livingston divorced his now ex-wife, Patricia Rossi, in 2009. Just before the divorce, their daughter, “J” (not named in court documents) was legally an adult and had graduated from Rutgers University. As part of the divorce settlement, the parents agreed that they would each pay half of the daughter’s costs to attend law school. Around that time, Livingston’s daughter stopped speaking to him.

Three years later, “J” was accepted to Cornell Law School. The cost of tuition, books, and living expenses for school totaled $74,580 per year. Livingston offered to contribute $7,500 per year for “J” to attend Rutgers Law School where she could continue to live at home. “J” didn’t discuss her choice with her father and chose Cornell.

A lawsuit was raised to force Livingston to honor the provision in the divorce decree requiring that he pay half of the expenses. Livingston, of course, disagrees, saying that it was unfair for him to pay for school. He argued that “J” waited too long after his divorce — and her college graduation — to apply to law school and that they had agreed that she would start law school within a year or so after graduation. He also felt that he should have been involved in the decision-making process and that the fact that he had no communication with “J” should alleviate his obligation to pay for her continuing education. The court disagreed and ruled that Livingston had to pay his share, or just over $112,000.

The two cases raise interesting questions about the rights of children to be supported — and the rights of parents to set the rules. This issue of whether or not a child might be dependent on his or her parents also raises some interesting tax consequences.

Generally, to be considered a dependent for tax purposes, a person must be either your qualifying child or your qualifying relative.

The rules for a qualifying child are pretty straightforward. A person is your qualifying child if that person meets all of these tests:

  • Relationship. The dependent must be your child, stepchild, adopted child, foster child, brother or sister, or a descendant of one of these.
  • Residence. The dependent must have the same residence as you for at least half of the tax year.
  • Age. The dependent must be:
    • (a) under age 19 at the end of the year and younger than you (or your spouse if filing jointly)
    • (b) under age 24 at the end of the year, a student, and younger than you (or your spouse if filing jointly), or
    • (c) any age if permanently and totally disabled
  • Support. The dependent must not have provided more than half of his or her own support during the tax year.
  • Return. The dependent, if married, must not have filed a joint return with his or her spouse.

Most likely, “J” wouldn’t meet the criteria as a qualifying child for her father, even if he pays half of her expenses. She is likely not under the age of 24 (assuming she graduated from college on time in 2009) and she doesn’t live with her father (nor would she if she were not at law school).

Interestingly, Rachel might not meet the criteria either, depending on how long she remains out of her parents’ care. While she does meet most of the tests, she may not meet the residency test if she remains at her friend’s house. Who is paying her expenses for this purpose doesn’t matter so long as she’s not paying her own way: the support test for a qualifying child doesn’t require the parent to pay half of the support but rather requires that the child can’t pay more than half of their own support.

Caveats and exceptions do apply: for example, college students may still be considered dependents even if they live away from home. There are also exceptions for temporary absences such as children who were born or died during the year, children of divorced or separated parents or parents who live apart, and kidnapped children.

However, there is no clear exception for a child choosing to remove himself or herself from the home. If, however, a child is emancipated under state law, for tax purposes, the child is treated as not living with either parent and cannot be considered their dependent.

The rules for a qualifying relative are more circumstantial — and more interesting in this case. Generally, a person is your qualifying relative — even if they’re not related to you (I know that’s confusing) — if that person meets all of these tests:

  • Residency OR Relationship. The dependent must live with you OR must be related to you.
  • Limited Income. The dependent must not have $3,900 or more of gross (total) income.
  • Support. You must provide more than half of the dependent’s total support for the year.
  • No Other Claims. The dependent must not be your qualifying child nor the qualifying child of anyone else.

There are special rules for divorced or separated parents or parents who live apart. In Rachel’s case, however, her parents are still together. Rachel could meet the relationship test but her parents would likely fail the support test. In this instance, it would matter that her friend’s father is paying her expenses. Depending on how long she stays — and how much he pays — Rachel’s friend’s father might be able to claim her as a dependent. Interesting result, right?

It would be an even more interesting result if the judge agreed to Rachel’s petition and required her parents to pay her “support” (she asked for $650 per week for expenses) plus private school tuition, medical and related bills, college expenses, and legal fees — and allowed her to remain at her friend’s home. In that event, she likely wouldn’t qualify as a dependent for her parents or for her friend’s father.

And “J”? Since the facts indicated that she had been working between college and law school and due to her assumed age and her father will pay at least half the cost of her law school expenses, she likely doesn’t qualify as a dependent for her mother or her father.

What about those support payments? Any payments made to or for the support of the child — whether for Rachel or J — have no federal income tax consequences. Child support is tax neutral. That means that the cost of paying child support is neither deductible to the payor nor is it income to the payee.

And those education expenses? That’s where that dependency determination could come back to hurt both sets of parents. Generally, you can claim the tuition and fees deduction if:

  • You pay qualified education expenses of higher education; and
  • You pay the education expenses for an eligible student; and
  • The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.

No dependent exemption = no tuition and fees deduction. The same rules apply for education credits.

The Tax Code focuses on bright lines (dollar amounts and numbers of days) and not emotions — and these cases involve a lot of emotions. We all parent differently and when things turn out a little different than planned — because of alcohol or boyfriends or divorces or estrangements or whatever — it’s hard for us to separate what we think should be the result from what the law believes to be the result. It will be a lot easier for IRS than the judges to make a determination in these cases.

That said, I’d love to hear your take on these issues. What do you think: when should a child no longer be your dependent?