Monday, January 5, 2009

Bed Buffaloes: IRS double-speak

The IRS does the best it can to translate the unbelievably complex tax law that Congress legislates into operational terms.

However, there are a few "terms of art" that make little sense to the unitiated.

1) "Married" to the IRS doesn't necessarily mean the same as "married" to the rest of us in every day life. If a legally married person lived apart from her spouse AND has a qualifying dependent, you should always check to see if she meets the "qualifications to be considered unmarried" for the purpose of Head of Household [HoH] filing status.

2) Your "Qualifying Child" is not necessarily "your child." Your Qualifying Child (QC) could be your child, but could also be your grandchild, your niece, your step-child, or a number of other possibilities, assuming the other QC criteria are met. Under some circumstances, your kid sister could be your QC. On the other hand, "your child" (in the usual sense of the word) may not be your QC, for example, if she didn't live with in the same household with you.

3) "Living with" doesn't mean the same thing to the IRS as it does to the rest of us. The IRS says that your child can be considered to have "lived with you for all 12 months" even if s/he was away most of the year, for example, if s/he was away at college, temporarily visiting relatives, in an extended hospital stay, in a juvenile detention facility, etc. because such absences are considered "temporary." Moreover, a baby born in December (or a child adopted then) is considered to have "lived with the parents for all 12 months" even if s/he only was physically present in the home in December (in the usual sense of the word.)

4) Your "Qualifying Relative" dependent is not necessarily "related" as most people usually use that word. A person who lived with you all 12 months who has no blood or legal relationship to you can be a "Qualifying Relative" who can qualify you to claim a dependency deduction.

So if you have an unrelated "starving artist roommate" who lives with you all year and meets the other criteria for QR dependent, you may be able to claim him as your QR dependent, which will result in a subtraction of $3,500 from your taxable income.

WARNING: Even though your starving artist roommate may qualify as your QR dependent, s/he will NOT help you qualify for HoH filing status. The starving artist is a QR dependent but is not a "Qualifying Person for HoH filing status."

Feeling confused? You are not alone. Even professional preparers can get confused.

As the case I posted from tax court shows, even IRS auditors and attorneys don't always get these distinctions right.

The flow charts in Pub 4012 are your strongest tool--use them!

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