A friend call me this morning. He wanted me to look into something a client wants to do. The background is the client is in Illinois where there is no separate and apart requirement and an amicable divorce takes 2-3 days to process.
Client got divorced in December, but remained in the house. Client's ex-spouse had no income for 2007 and apparently will agree to anything. (How come I never find these women?) Client wants to file HoH and claim is ex-spouse as a dependent.
I recall an Indiana Tax Court case in the '80's where something similar occured. In that case, the husband had custody of six children, wife returned a year or so later, lived with him, and had another child. IRS classified her as a unpaid domestic worker. Tax Court reject the IRS' position. I recall it because it made the then Wednesday Tax Column on the front page of the Wall Street Journal.
My take on the Illinois client is "get a large fee upfront and do not plan on representing him when he gets audited."
And my take on this is that if you aren't sure about the law, do not preparer the return. IOW, never prepare a return unless you are willing to represent the client.
In order to claim her as his dependent, she must pass the Qualifying Relative tests, including the support test (he provided more than half her support.)
And in order to claim HoH he must have a HoH qualifying person. One requirment to be an HoH Qualifying Person is a close blood relationship. Ex-spouse fails this test.
Pub 501 has good decriptions on both these issues.
Unfortunately, except in the cases of qualifying-child tie-breaker rules and signing a joint return (neither of which apply here), her "agreement" or lack thereof has no bearing on the tax matter. I wonder if she also agreed to no alimony? The benefit of that to him will probably dwarf any tax benefit from claiming her as a dependent.
Harlan Lunsford wrote: > And my take on this is that if you aren't sure about the law, do not > preparer the return. > IOW, never prepare a return unless you are willing to represent the > client.
Right -- just signing it as a paid preparer puts you at risk, whether you are willing to represent down the road or not.
Arthur Kamlet wrote: > In order to claim her as his dependent, she must pass the > Qualifying Relative tests, including the support test (he > provided more than half her support.)
That's the messy part -- just because she had no income doesn't mean she didn't provide a significant portion of her own support, especially if she owns (or owned) half of a house they live in. She might also have spent money from gifts, loans, or savings to support herself. As mentioned, Pub 501 has help for this, including a support worksheet.
One of the underlying points of this new rule is state court orders involving dependency exemptions and, presumably, HoH qualifying persons, are moot for federal tax purposes. Oh, a divorce is a divorce and I suppose an annulment is an annulment. But an order assigning the dependency exemption issued from now on will be ignored for federal tax purposes.
Besides, HoH does not demand that he merely support an HoH qualifying person, it demands that he provide most of the Household costs for her.
One other item is that if he is required to pay her alimony, sometimes called spousal support, and they are now living together, whether or not for fun and profit, the alimony is neither deductible by him nor taxable to her.
I would think that divorce attorney CPEs would include a lesson on adding "Jane Doe will be requird to complete IRS Form 8332 or its successor forms assigning the dependency exemption to John Doe every year until the minor child Junior Doe is age 21" and then the only relief Jane would have if John refuses to sign an 8332 is to go back to the state court to compel John to comply.
And now getting a multiyear 8332 is fraught with a great deal of danger should the custodial parent wish to revoke it.
And if the order was conditional, as just about all orders written in Franklin County Ohio are when child support is involved, the state court is the only one to determine if the condition has been met.
Pub 504 is clear as mud on this, especially since the term "spouse" is also used to mean "former spouse" unless otherwise stated. If the divorce is final, can't they still live in the same household and claim/deduct alimony?
"Exception. If you are not legally separated under a decree of divorce or separate maintenance, a payment under a written separation agreement, support decree, or other court order may qualify as alimony even if you are members of the same household when the payment is made."
If the children lived with each parent the same number of days during the year, the custodial parent is the one with higher AGI. So, why does he need a Form 8332? Aren't they already his qualifying children for dependency purposes (and HOH, for that matter)?
Incidentally, back to the original topic: Pub 504 also contains this statement:
"If you obtained a final decree of divorce or separate maintenance by the end of the year, you cannot take your former spouse's exemption. This rule applies even if you provided all of your former spouse's support."
I don't know what, if anything appears in Pub 504 before or after the quoted passage but payments by one person to another are not alimony if they are living in the same household.
This wouldn't be applicable in the case here as the OP stated the individual is legally divorced so he wouldn't meet the "not" portion of the initial qualifying phrase.
No, it's not that simple. There's one clear exception, the "one-month-before-leaving rule". Further, the "living in the same household" rule *only* applies under a specific condition, that's what I'm struggling with. I'm not a lawyer but have always understood that "legally separated" and "divorced" are two distinct statuses, even though in some areas of the tax code they are treated the same. My question is, in this area (tax impact of alimony payments), is that also true? It looks to me from Pub 504 that it is not.
Here is the full context of the "exception" quoted above:
---[quote]--- Spouses cannot be members of the same household.
Payments to your spouse while you are members of the same household are not alimony if you are legally separated under a decree of divorce or separate maintenance. A home you formerly shared is considered one household, even if you physically separate yourselves in the home.
You are not treated as members of the same household if one of you is preparing to leave the household and does leave no later than one month after the date of the payment.
Exception: [...]
---[end quote]---
Elsewhere under "Alimony requirements", one of the conditions that must be met:
"The spouses are not members of the same household at the time the payments are made. This requirement applies only if the spouses are legally separated under a decree of divorce or separate maintenance."
Remember that the term "spouse" usually includes "former spouse" under the language of Pub 504.
To take Dick's original example further, suppose parents whose divorce was finalized in some prior year, and who have been living apart, now decide to live together again with their kids and do so for the entire year. Seems to me the following statements are true in this case:
1) alimony paid is deductible for the payer, taxable income to the recipient. (they are divorced, not just legally separated, so the requirement about separate households does not apply).
2) If there is no alimony or it is below the exemption amount (unlikely), and the support test is met, the ex-spouse with no other income can be claimed as a dependent by the other parent.
3) The parent with the higher AGI is the custodial parent and can claim the kids' dependency exemptions and HOH filing status (assuming all other normal tests are met).
If so, the tie-breaker rules apply to qualifying children of more than one taxpayer.
So, e.g., if the two parents, now divorced, lived together all year, the tie-breaker rules then give the dependency exemption to the higher AGI taxpayer.
Many years ago, just after the dinosaurs dissappeared, the tie- breaker rules (somewhat different then) automatically gave the EIC qualifying child to the higher AGI parent.
But since the invention of the greatly misnamed Uniform Definition of Qualifying Child, the tie-breaker rules are optional, and are brought into play only when the two or more parties do not agree on who gets to claim the qualifying child.
There are
i) personal exemptions, one per taxpayer listed on Form 1040 lines 8a and 6b
ii) dependency exemption for each dependent listed on line 6c.
I believe Pub 504 is referring to the personal exemption and not the dependency exemption.
Assuming that's correct, just because two people live in the same house doesn't mean they live in the same house. Remember the [unofficial but often cited] bedroom rule?
I haven't researched in with respect to this particular situation, but in general they are treated the same. Legally separated means a court decree of legal separation that is the functional equivalent of divorce for people whose religion forbids them to get an actual divorce. Except with respect to bigamy laws, they are treated as divorced in just about every other way.
Personally I think this comes down to same house vs. same household. I've known divorced couples who remained roommates. I don't think they could be said to have been in the same household.
Since when does alimony HAVE to be a payment from one former spouse to another? All that is required is that it be a payment of spousal support - for which it could also be paid directly to third parties (e.g. utility companies, etc.) on behalf of the otherwise receiving former spouse.
IRC 71(b)(1) "[S]uch payment is received by (OR ON BEHALF OF) a spouse under a divorce or separation instrument," (capitalization added).
A direct payment to a third party for the former spouse's living expenses is a payment "on behalf of" that former spouse. (Just like "out of pocket" expenses for participating in charitable events are deductible as contributions.)
I do agree that 71(b)(1)(C) does require that the former spouses may not be members of the same household for the amount to be includible by the recipient and deductible by the payor - but it's still alimony. However, it's restricted to those legally separated or divorced (a COMPLETED action), but may not apply to those where the action is merely PENDING with an interim agreement in place. I think that's what publication 504 is getting at.
At first I thought so, and yes the tie-breaker rules are optional if the taxpayers mutually agree which will claim the dependency. This would normally be the case for parent/grandparent deciding who will claim a child living with both, as a common example.
But the "special rule for divorced/separated parents" requires that exactly one parent must be the custodial parent. Per the recent posting on "Final Regs Published Section 152(e)", it states that if the number of days (nights) spent with each parent is equal, then the higher AGI parent becomes by definition the custodial parent.
Effectively, the tie-breaker rule is mandatory, not optional in this special case, and can only be overridden by use of Form 8332 (unless I'm missing something, and I confess I haven't read every word).
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.