Qual child vs qual relative

[Margaret CPA in OH]

Unmarried same sex couple have a child. The birth mother earned less than $2000. The other partner provides all support. The birth mother is not required to file but I cannot definitively determine the child's dependent status. The child - can - be claimed by the birth mother but won't be because she is not required to file.

So does this child qualify to claimed as a dependent by the other partner because the birth mother did not file? And if so, would this be a qualifying child or qualifying relative? The other partner has legal co-custody. They state they are not in violation of local law.

Thanks for any help with this!

[Pacun]

The adult that provided more than 50% of support is the only one that can claim the exemption of her friend (the child), provided that her friend lived with her all year. Since they are only friends, the child cannot be her qualifying child or relative.

[Margaret CPA in OH]

Thanks for responding, Pacun, but further research has provided the answer. The child can, in fact, be claimed by the taxpayer as a qualifying relative in this case. "A person will not be considered to be the qualifying child of another taxpayer is that other taxpayer is not required to file a tax return under IRC sec. 6012 and that person (1) does not file an income tax return or (2) files solely to claim a refund of withheld income taxes. (Notice 2008-5)"

So the child and the birth mother both meet the criteria to be qualifying relatives of this taxpayer but the child is NOT a qualifying child. This, despite the legal co-custody agreement, it appears.

Dependents, credits, exemptions, UGH! Time to seriously look at retirement!

[jainen]

>>despite the legal co-custody agreement<<

The custody agreement is a matter of state law, which generally does not affect federal taxation except in specific circumstances. However, it may affect STATE taxation. In California, for example, the custodial parent is the one named in the divorce decree, regardless of number of nights in the home. In many cases a child should be a dependent on one parent's federal return and the other parent's state return. (I say "should," because nobody really does it that way.)

[Margaret CPA in OH]

Well, the client is stating that the court document ordering joint-custodial status defining rights and responsibilities meets the test under Pub. 501 for Foster child. That is, a 'foster child is an individual who is placed with you...by judgment, decree, or other order of any court of competent jurisdiction.' This matters for child tax credit purposes. Both the client and birth mother have equal rights and responsibilities plus the client is ordered to provided healthcare insurance coverage for the minor child through employment, if available.

So I'm now hung up on the term, "placed with you." I am not a lawyer. I know the clear intent here but want to be sure when filing this return. Any attorneys out there?

[kcjenkins]

Margaret, I agree with you, she can claim the child under the rule you cite.

[Margaret CPA in OH]

KC, are saying to claim the child as qualifying child (not qualifying relative) and receive child care tax credit? As I wrote, I am hung up on the 'placed with you' phrase in Pub. 501. The child was not placed there but there is clearly a court decree ordering rights and responsibilities. And thanks for weighing in!

[grandmabee]

KC, are saying to claim the child as qualifying child (not qualifying relative) and receive child care tax credit? As I wrote, I am hung up on the 'placed with you' phrase in Pub. 501. The child was not placed there but there is clearly a court decree ordering rights and responsibilities. And thanks for weighing in!

you mean child tax credit right?

[Margaret CPA in OH]

Thanks, bcolleen, child tax credit. The snow is blinding me and interfering with proper thinking.

[kcjenkins]

KC, are saying to claim the child as qualifying child (not qualifying relative) and receive child care tax credit? As I wrote, I am hung up on the 'placed with you' phrase in Pub. 501. The child was not placed there but there is clearly a court decree ordering rights and responsibilities. And thanks for weighing in!

"Placed with you" does not mean the court brings the kid to your house, it means the court granted you custody through either the foster care system or though some other court action. If a court action gives you custody [or joint custody] then you treat the child as your own for tax purposes, as long as you had that custody for more than half the year.

[Margaret CPA in OH]

KC, thank you, thank you, thank you. I tend to take things quite literally, including this time. I so appreciate your willingness to share your legal as well as tax expertise here. My client will be very pleased!

[jainen]

>> meets the test under Pub. 501 for Foster child.<<

I'll give credit for originality, but I don't think it will fly. "Custody" would be a very odd word for a court to use if it intends to place a foster child, because custody implies a long-term parental or guardian relationship that is specifically absent in the foster arrangement. I would be cautiously open to reading the actual decree, but without further evidence I would leave this as qualifying relative.

[Margaret CPA in OH]

Fair enough, jainen, but what 'further evidence' would be desired? The pub. states a 'foster child is an individual who is placed with you by....judgment, decree, or other order of any court of competent jurisdiction.' KC has stated that 'placed with' means also grants custody. The court order does that. What do you think is missing?

[jainen]

>>What do you think is missing?<<

What is missing is whatever the court ruling might actually say one way or another. I do not agree that custody is synonymous with placement. In my opinion (though I am not a lawyer) they are two separate issues.

[Margaret CPA in OH]

I had the same concern which is why I asked for any attorneys to weigh in and KC did so, graciously. I asked what you think is missing because perhaps I can find something specific in the document which addresses that. I could retype the entire thing here omitting the identifying names, of course. Would that be of any use? While you are not an attorney, I nonetheless respect your wisdom and cautiousness about tax issues.

I wonder if there are state documents that precisely define placement, foster child, custody, etc. The decree does address custody, visitation and support rights which sounds like a divorce decree, doesn't it? I just want to be correct on this.

[BulldogTom]

How interesting. How long have you had these clients Margaret? Are they new to you? This is kinda fascinating to me.

I don't know what state you are in, so I won't assume that I know anything about your state's laws concerning a child/parent or child/foster parent relationship. It seems to me though that a parent gets custody and the custody is permanent unless changed by the court. And it seems to me that a foster parent gets guardianship and it is a temporary arrangement until changed by the court.

Now here comes your client. One is clearly the parent and has custody of the child. That person is granted all the benefits of the tax law related to children by right of birthing the child. No question about that. The other member of the household is trying to also gain those benefits of parenthood for the same child. But this taxpayer wants to go the fosterchild route.

If in fact the court has granted the other spouse "joint custody" of the child, then it would seem to me that the child is hers just as any other child who a court has deemed to be a custodial parent. If the court in fact did this, the child is a child of the second taxpayer. But the taxpayer is not saying that, now is she? She is saying that this child is her foster child.

HMMMMMMMMMMMMmmmmmmm - something does not add up. I know for sure that if I was in a relationship and I wanted to know the status of my partner's child in relation to me, I would has someone spell it out pretty plain. And I am not talking about a measly $1000 tax credit. If I went to all the trouble to go to court, I would surely understand what rights and responsibilities that I came out of court with.

Hmmmmmmmmmm - Just not sure about this one.

Tom

Lodi, CA

[Margaret CPA in OH]

Great thoughts, Tom. That's why I am so unsettled about this. Just a short while ago I called an attorney friend who has similar circumstances personally. She and her partner are both attorneys so the birth parent will always be able to claim the child without question as both work. Interestingly, this attorney in the same state gave the opinion supporting jainen's position. Custody is not the same as placement of a foster child in her opinion.

This client would not choose to call this child a foster child but, because the laws do not permit marriage nor adoption by her of this child, she is in a sort of limbo. It isn't just the $1000 ctc, either. It is somewhat of an affront to have to put "none" as the relationship and consider the child merely a qualifying relative.

The court order states that my client 'is also now to be considered a custodian as the result of the agreement of the parties....and does not in any way terminate (mother's) legal status as parent of the minor child.' It goes on to specify certain rights and responsibilities but only so far as the state can determine. Federal tax status isn't one of those.

I am afraid that I side with the qualifying relative status and will likely lose this client after 11 years. But I can't put down what I don't believe is supported by the law. And I don't believe now, based on the local attorney's opinion, that calling this child a foster child is correct. I just wish this weren't so complicated. I know this to be a loving family and this child is every bit as much a loved child by my client as any parent-child relationship.

Thanks for your input.

[BulldogTom]

Why do you think you will lose the client? You have considered their tax situation and have applied the law as you see it should be applied. If your clients are not satisfied with the results of your analysis (which I think is right on by the way) shouldn't they fire the writers of the law and not the preparer of the return. If they want to blame you for the result they got, you are better off without them.

Explain that you cannot make foster child fly on a federal return. It just does not fit the federal definition. But the taxpayer does get to claim the dependency exemption based on qualifying relative.

Tom

Lodi, CA

[Margaret CPA in OH]

Tom, I think I will lose her because she seems quite firm that her child should be recognized as her child in all respects. I am now convinced, however, that I cannot list the child as a foster child on the tax return, that my uneasiness and uncertainty is well-founded. I do appreciate all the input here, especially from KC with legal opinion. But the local attorney's opinion is more weighty, I think. Especially as the local attorney has the same situation.

Oh well, should she choose to go elsewhere, at least I won't be anxious about trying to defend a position of which I am not certain.

Thanks again to all for responses.

[BulldogTom]

Margaret,

We as professional tax preparers must keep an objective point of view. Our clients may want us to advocate for social change, but that is not our job. There may very well be a preparer out there who will take this position and give the client what she is asking for, which in my opinion is marital status on her tax return. She wants you to recognize her position as a married individual and apply the tax law as such. Unfortunately for her, it is not how the tax law is written. So she is trying to make the tax law fit her circumstances. Don't fall into that trap. There are a ton of tax laws that we don't like (see the post on the kiddie tax and the passionate feelings some have regarding that tax). But, while we can rail about these things to each other, we have a standard of practice to uphold. We must apply the tax law how it is written and interpreted by the court. You are not an advocate for change in the tax code when you are preparing a return. If your client does not get that, they don't understand the service you provide.

Stay strong and quit beating yourself up. Think about it this way. If you do what they want, the upside is a happy client and the downside is you lose your livelyhood if the IRS determines you intentionally disregarded the rules of practice. Is the client going to pay that much for your services?

Tom

Lodi, CA

[Margaret CPA in OH]

Just as I was preparing an email to this client, basically saying what you have said in explaining why I could not go along with her position, she called. We had a pleasant discussion, she did understand and holds me blameless and asked that I send her the email anyway. I did so and asked her to just let me know her decision but that I cannot file the child as a foster child.

She appreciates, more than I originally gave her credit for, my position and integrity. I believe she will ask me to file correctly and continue her work for social change while following the current laws. I don't believe she holds a grudge against me, either. I just hope she does not decide to go against professional advice. I have not given her a tax return to review yet so she would have to start from scratch.

This is one of the toughest client situations I have had to deal with in over 20 years. I have no clients that need EITC and have never had a custody issue before. Most of my folks are higher income, more complex situations, including kiddie tax! but this has been perhaps the most emotional. I've lost a handful of clients because of dubious financial dealings, especially with self-employment, so I really don't compromise my ethical standards. I just ask them to go elsewhere as I am unable to assist them.

Thanks again!

[kcjenkins]

Margaret, I am not an attorney, my son is the attorney. My advice was based on my assumptions based on your posts, but given the further info you provided after that, I agree, the child is a 'qualifying relative' not a foster child. If the client is so hung up on the wording that she would quit you over your doing it right, then you have to politely tell her you can not do the return the way she wants, because it is legally incorrect to do it that way. Sometimes clients just refuse to understand that we are limited to 'what the law requires', not what we want.

[Margaret CPA in OH]

Thanks for clarifying your status, KC. And special thanks to your son, too, as he must have shared his expertise via your gracious intervention many times with us. As mentioned in my latest entry, I do believe that she will do the right thing and she did say she is not upset with me. I will remember the phrase, though, that we are limited to what the law requires. I just want to be certain that I understand what the law does require. I think we all come down on the same side of this issue. I don't think it will be the last time some of us will be faced with it.

The next and continuing issue (with a new client today...sigh) is the substantiation of business use of listed property and mileage records. And I specialized in tax in graduate school because I really dislike audit!

Thanks again to you and all for helping me and any others to work through this process!