Gross income and dependency

[Margaret CPA in OH]

New clients, mother and daughter, have filed for several years with adult daughter on disability as mother's dependent.  In 2015, daughter sold stock for $47,000, basis $55,000, to aid in support.  Tax return shows loss of course and she otherwise wouldn't have to file with taxable income below requirement.  Question is, with AGI in negative territory ($3000 loss, SSI non taxable), does she still qualify as dependent on mother even though she used the proceeds for her own support?  I say yes, they are not so sure.  What say you?

[Lion EA]

Is the $47,000+ that daughter spent on her own support all in one year, and is it more than half her support for the year(s) in which she spent it?  You may have to fill out a support worksheet with them.  Probably want to, to keep in your files no matter which way it works out.  (Here in pricey Fairfield County, CT, especially with any medical costs for the daughter paid by the mother, $47,000+ could well be less than half the support.)

Even if daughter is not dependent for a year or more, mother can deduct medical payments mother makes to healthcare providers on daughter's behalf, yes?

[Catherine]

20 minutes ago, Lion EA said:

mother can deduct medical payments mother makes to healthcare providers on daughter's behalf, yes?

Yes.  Medical payments can be deducted.  TTB says (paraphrased) "taxpayers can deduct med exp's paid for an individual who would have been a dependent except that (thee items, #1 being gross income of $4k or more)."

[Margaret CPA in OH]

Thanks for the replies.  I did have them complete a support worksheet and it seems clear that daughter paid more for her support in 2015 than did mother.  She used proceeds for medical bills, car repairs, travel, new clothes, etc. 

Mother has listed and I have included those medical bills that she paid for daughter.  They keep very detailed lists of who paid how much for everything outside of food.

My question is whether, just by looking at the 1040 with negative AGI, she could be considered mother's dependent.  We know that she had much cash and spent more on herself than did mother (support worksheet) in 2015 but they look at the negative AGI and say how can daughter not be dependent?  I have assured them that this is likely a one-off and mother loses only the exemption for one year.  I'm just not sure how IRS would crunch the numbers showing gross receipt from stock sales of $55,000 and yet being a dependent in rural Ohio.  Sadly, she loses the carryover losses as 2016 she will be dependent again I'm fairly certain.

[Lion EA]

Daughter can preserve her carryover losses while filing as a dependent.

If daughter paid more than half her own support, she is not a dependent child.  If mother did not pay more than half her daughter's support (plus meeting other qualifications), then daughter is not a dependent relative.  Redo the worksheet next year to test.

And, if mother is paying anything for daughter, have it be medical expenses directly to the healthcare providers so mother can deduct even when she does not have the dependency.

Get mother/daughter to call you before selling daughter's investments, so you can calculate how much to sell in a year to preserve the dependency deduction -- if that is the goal.  Or to pay the least tax for the two of them -- if that is the goal.  Remind them that you could have helped them BEFORE they made financial moves but that options are much more limited afterwards.

[Margaret CPA in OH]

Thanks, Lion.  Daughter has no additional investments to sell and has nearly exhausted savings which led to the sale of stock in 2015.  I am certain that future will always be dependent on mother.  Her SSI is fairly low and not taxable.

She will have no taxable income in the future to offset the remaining losses.  In 2015 she had about $1800 in dividends but that will be zero in the future as there are no holdings to provide divs.

I am aware of payments directly to health care providers which mother has done and does take as deduction.

Yes, getting advice before acting is a good thing but their previous preparer (who may not have been much help anyway), suddenly retired in January so they came to me - after the fact.

Now if only someone could help with the Bermuda investment mother inherited from her mother.....What a mess!  Forms 926 and 8621 all for less than $3 income!  She claims she can't sell it as she keeps getting the runaround from her advisor.  Sheesh!