Margaret CPA in OH Posted March 1, 2012 Report Share Posted March 1, 2012 Client has 28 year old son living at home finishing doctoral degree. He had no (wage) income in 2011, qualified tuition and other charges of $17,958, nonqualified charges of $1541 and student loans of $23,716. And $4217 refunded back to him. Is the refund back to him 'income' in excess of $3700 which would kick him out of qualifying relative status? QF says "Borrowed funds used for support are counted when support is furnished, not when repaid." But does that apply here? The real issue is more than half the support. So is the education portion of support only the qualified expenses? That plus the unqualified expenses? The total of the loans minus the refunds? I'm already getting some kick back because the client 'cannot answer (my) questions about how much it costs to feed him or provide shelter.' He makes a lunch EVERYDAY (her emphasis) so I assume that she provides all the fixin's. He became engaged in 2011 giving a huge rock to the intended but I wouldn't think gifts would be part of total support - or would they? And I haven't any answers yet about transportation costs (school is about 15 miles from home) or entertainment with intended or travel to and from end of state where she lives. I may lose a friend with this as it would amount to about $2000 with the income tax savings and LLC education credit, depending. And she owes $6000+ without it already. I hate it when things are, to me, a bit murky. Any guidance appreciated! Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted March 1, 2012 Report Share Posted March 1, 2012 If he claimed the LLC education credit, he would have to claim himself on HIS tax return. This alone will prevent her from claiming him a qualifying relative. File it, get the rejection, explain again, charge a reasonable P.I.T.A. charge and let the chips fall where they may. If the student loans are in HIS name, she cannot claim that expense as part of supporting him. Maybe it is time to politely fire her??? Quote Link to comment Share on other sites More sharing options...
Margaret CPA in OH Posted March 1, 2012 Author Report Share Posted March 1, 2012 According to the QF summary, LLC can be claimed for a dependent for undergraduate or graduate education. And in the Student Loan Interest section, it states that the interest deduction would not be allowed when the parents claim a dependency deduction and the student takes out the loan because the parents are not legally obligated to repay. However, "it may make sense for the student/child to take out the loan when payments will not be due until after graduation, at which point the child will likely no longer be claimed as a dependent and can, therefore, deduct the interest on his loan." But I guess if the loans total more than half the support, he could not be dependent as the borrowed funds count then, not when repaid. That seems to me that he does qualify from both those perspectives and seems to be clear that the loans can be in the name of the student. But I do believe that the total is pretty clearly more than half his support. I think it would be easier to swallow and for me to explain that the money refunded to him was in excess of the $3700 dollar limit but am not sure that it counts as 'income.' She won't be a happy camper but I don't think it's possible to exceed even the lower amount as 50%. Sigh, because he had no income outside of $56 in dividends, this credit is totally lost. It's a shame that he worked so hard to get this far and arrange his life to be able to finish this degree without having to work and now there is no benefit to him or mother who is providing the home. I suppose he didn't have to choose such expensive education.... Thanks! Quote Link to comment Share on other sites More sharing options...
JohnH Posted March 1, 2012 Report Share Posted March 1, 2012 I can understand the anxiety over possibly losing a friend, but let me make a suggestion. I've had to take this route a couple of times in the past few years. Tell her this is your understanding of the tax law, but you don't know everything and if she wants to take it to someone else it won't hurt your feelings. Her friendship is more important to you that having an unhappy client who has doubts about your advice. She may take it to someone who will give her the answer she wants to hear. If that happens and she comes back to see if you will reconsider, stand your ground. If she decides to have the other person prepare the return, then anything that happens is strictly between her and the other preparer. You;re off the hook professionally. She may consider what you've said and decide she trusts your judgement to do what's best for her even when the news isn't good. Regardless of the outcome, you've separated the business relationship from the friendship. Many of our clients are also personal friends, but there is a dividing line between business and personal. You've encountered a situation where this has to be acknowledged. What if she refuses to appreciate the integirty of your offer? Then I suggest that she's just using a facade of friendship to try and bully you into doing what she wants (regardless of the potential risk to you). That isn't a friend - that's a user. 2 Quote Link to comment Share on other sites More sharing options...
Margaret CPA in OH Posted March 1, 2012 Author Report Share Posted March 1, 2012 Thanks, JohnH, for this suggestion. I will use a modification of it. This person is also my insurance agent, her husband's S-corp is my client, and they have an LLC with rental property as my client. And she is my faith buddy and monthly Margarita pal. I know, I know, too incestuous but it is what it is. We've been through other trying times so will likely weather this one, too. She certainly isn't using me these past 15+ years but I know it will be a financial blow. Maybe she will try someone else and I really don't know everything (can you tell?) - her choice to make and I will offer. Thanks again! 1 Quote Link to comment Share on other sites More sharing options...
JohnH Posted March 1, 2012 Report Share Posted March 1, 2012 You could always print off what I wrote and show it to her - blame it on me. :) 1 Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted March 1, 2012 Report Share Posted March 1, 2012 Thanks, JohnH, for this suggestion. I will use a modification of it. This person is also my insurance agent, her husband's S-corp is my client, and they have an LLC with rental property as my client. And she is my faith buddy and monthly Margarita pal. I know, I know, too incestuous but it is what it is. We've been through other trying times so will likely weather this one, too. She certainly isn't using me these past 15+ years but I know it will be a financial blow. Maybe she will try someone else and I really don't know everything (can you tell?) - her choice to make and I will offer. Thanks again! Remind her that you are more than ever under scrutiny of the IRS concerning Circular 230 and all the new regulations and fines. No matter how much she adds to your bottom line, she is not worth losing your ability to prepare taxes if the manure hits the rotating oscillator!! Quote Link to comment Share on other sites More sharing options...
Lion EA Posted March 1, 2012 Report Share Posted March 1, 2012 FIll out a dependency support worksheet. Ask her to go over it with you to get the most accurate numbers she can provide. Then you have it on paper, either over 50% or not. Save it in your files. 1 Quote Link to comment Share on other sites More sharing options...
Margaret CPA in OH Posted March 1, 2012 Author Report Share Posted March 1, 2012 Thanks all for these really good ideas. Lion, I will create a sheet based exactly on the text and have her complete it but fill in first the student loan amount as his provided support. Let's see where they end up. And you're right, Jack. Even with reducing my practice, I'm not ready to throw in the towel and really want to avoid any of that manure! Quote Link to comment Share on other sites More sharing options...
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