Tax breaks for qualifying relatives are limited – what you should know
Internal Legal Memorandum 200812024
Mike Habib, EA
myIRSTaxRelief.com
An Internal Legal Memorandum (ILM) explains that various tax breaks are not allowed for qualifying relatives. Specifically, the ILM concludes that, apart from a dependency exemption, a taxpayer’s qualifying relative may not qualify him for the earned income credit, head of household filing status, or the child tax credit, but in limited circumstances may qualify the taxpayer for the child and dependent care credit.
Background. A taxpayer is entitled to a deduction equal to the exemption amount for each person who qualifies as his “dependent.” (Code Sec. 151(c))
A person qualifies as the taxpayer’s dependent if the person is the taxpayer’s qualifying child or qualifying relative. (Code Sec. 152(a)) The terms “qualifying child” and “qualifying relative” were added to Code Sec. 152 by the Working Families Tax Relief Act of 2004 (WFTRA), effective for tax years beginning after 2004. WFTRA established a uniform definition of a “qualifying child” for determining whether a taxpayer may claim certain child-related tax benefits. It established the term “qualifying relative” to identify individuals (other than a qualifying child) for whom a dependency exemption deduction may be allowed.
A “qualifying child” of a taxpayer is an individual who: (A) bears a certain relationship to the taxpayer, (B) has the same principal place of abode as the taxpayer for more than one-half of the tax year, (C) meets certain age requirements, and (D) has not provided over one-half of his or her own support for the calendar year. (Code Sec. 152(c)(1))
A “qualifying relative” is an individual: (A) who bears a specified relationship to the taxpayer (Code Sec. 152(d)(1)(A)); (B) whose gross income for the calendar year in which that tax year begins is less than the exemption amount (Code Sec. 152(d)(1)(B)); (C) with respect to whom the taxpayer provides over one-half of his or her support for the calendar year in which that tax year begins (Code Sec. 152(d)(1)(C)); and (D) who isn’t a qualifying child of that taxpayer or of any other taxpayer for any tax year that begins in the calendar year in which that tax year begins. (Code Sec. 152(d)(1)(D))
Observation: An individual need not be technically related to a person to qualify as the person’s qualifying relative. That’s because, the specified relationships include in-laws and an individual who, for the tax year of the taxpayer, has as such individual’s principal place of abode the home of the taxpayer and is a member of the taxpayer’s household. (Code Sec. 152(d)(2))
Notice 2008-5, 2008-2 IRB, provides guidance on individuals who may be qualifying relatives of a taxpayer under Code Sec. 152(d). Specifically, it clarifies that, solely for purposes of Code Sec. 152(d)(1)(D), an individual is not a qualifying child of “any other taxpayer” if the individual’s parent (or other person with respect to whom the individual is defined as a qualifying child) is not required by Code Sec. 6012 to file an income tax return and (i) does not file an income tax return, or (ii) files an income tax return solely to obtain a refund of withheld income taxes. Notice 2008-5 clarifies that a taxpayer may claim a dependency exemption deduction for an unrelated child of an unrelated individual who lived with the taxpayer as a member of the taxpayer’s household for the entire year.
Illustration: Andrew supports as members of his household for the tax year an unrelated friend, Betty, and her 3-year-old child, Carole. Betty has no gross income, is not required by Code Sec. 6012 to file an income tax return, and does not file an income tax return for the tax year. Accordingly, because Betty does not have a filing requirement and did not file an income tax return, Carole is not treated as a qualifying child of Betty or any other taxpayer, and Andrew may claim both Betty and Carole as his qualifying relatives, provided all other requirements of Code Sec. 151 and Code Sec. 152 are met. (Notice 2008-5)
Earned income credit. An eligible individual may be allowed an earned income credit under Code Sec. 32 . In general, an eligible individual is (i) any individual who has a qualifying child for the tax year, or (ii) any other individual who does not have a qualifying child for the tax year, if certain requirements are met, such as age and residency, and that the individual is not a dependent of someone else. The ILM says that a taxpayer who may claim an individual as his or her qualifying relative under Notice 2008-5 , may not use that individual for purposes of claiming the earned income credit because the credit requires that the dependent be a qualifying child, not a qualifying relative, of the taxpayer.
Head of household filing status. Under Code Sec. 2(b)(1), an individual is a head of a household if, and only if, he is not married at the close of his tax year, is not a surviving spouse, and either (1) maintains as his home a household which constitutes for more than one-half of the tax year the principal place of abode, as a member of such household, (i) a qualifying child of the individual, or (ii) any other person who is a dependent of the taxpayer, if the taxpayer is entitled to a deduction under Code Sec. 151 for the tax year, or (2) maintains a household which constitutes for such tax year the principal place of abode of the father or mother of the taxpayer, if the taxpayer is entitled to a deduction for the tax year for such father or mother under Code Sec. 151. A taxpayer cannot be considered a head of a household by reason of an individual who would not be a dependent for the tax year but for (i) Code Sec. 152(d)(2)(H) or (ii) Code Sec. 152(d)(3), relating to multiple support agreements. Thus, the ILM concludes that a taxpayer who may claim an individual as his or her qualifying relative under Notice 2008-5 because that individual was a member of the taxpayer’s household, but who does not have a specified familial relationship to the individual, may not claim head of household filing status.
Child tax credit. Under Code Sec. 24(a), a taxpayer may be allowed a credit of $1,000 for each qualifying child of the taxpayer. The ILM concludes that a taxpayer who may claim an individual as his or her qualifying relative under Notice 2008-5 may not use that individual for purposes of claiming the child tax credit because the credit requires that the dependent be a qualifying child, not a qualifying relative, of the taxpayer.
Observation: The ILM does not point out that an individual can be a taxpayer’s qualifying child for child tax credit purposes without necessarily being the taxpayer’s actual child. That’s because, for this purpose, a qualifying child is defined to include a brother, sister, stepbrother, or stepsister of the taxpayer or a descendant of these relatives. (Code Sec. 26(c)(1), Code Sec. 152(c)(2))
Dependent care credit. A taxpayer with one or more qualifying individuals may be allowed a dependent care credit under Code Sec. 21. A “qualifying individual” is (1) a dependent of the taxpayer (as defined in Code Sec. 152(a)(1) who has not attained age 13, (2) a dependent of the taxpayer (as defined in Code Sec. 152 determined without regard to Code Sec. 152(b)(1), Code Sec. 152(b)(2), and Code Sec. 152(d)(1)(B)) who is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than half of the year, or (3) the spouse of the taxpayer, if the spouse is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than half of the tax year. The ILM states that Code Sec. 152(a)(1) provides that a dependent is a qualifying child, and as a result, the dependent care credit is limited to taxpayers with one or more qualifying children under the age of 13. A taxpayer who may claim an individual as his or her qualifying relative may not claim the dependent care credit, unless that qualifying relative is physically or mentally disabled.
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