IRS Clarifies Qualifying Relative

The following is an excerpt from the NSTP (National Society of Tax Professionals) ........

IRS Clarifies Qualifying Relative for Purposes of Section 152(d)(1)

IRS Notice 2008-5 provides guidance under section 152(d) of the Internal Revenue Code for determining whether an individual is a qualifying relative for whom the taxpayer may claim a dependency exemption deduction under section 151(c). It brings the IRS guidance into compliance with the tax code with respect to unrelated children whom a taxpayer can claim as a dependent under the “other relative” provision of the IRC for a person who lives in the taxpayer’s home for the full tax year and met all five tests.

Prior to IRS Notice 2008-5, with the IRC stated that the dependent exemption could only be taken if the child was “not the qualifying child of another taxpayer.”

IRS Notice 2008-5 clarifies the definition of “another taxpayer” to exclude persons who are not required to file a tax return and do not file a tax return, or only do so to claim a refund of taxes withheld.

The following examples were offered in the announcement:

Example 1.

A supports as members of his household for the taxable year an unrelated friend, B, and her 3-year-old child, C. B has no gross income, is not required by section 6012 to file an income tax return, and does not file an income tax return for the taxable year. Accordingly, because B does not have a filing requirement and did not file an income tax return, C is not treated as a qualifying child of B or any other taxpayer, and A may claim both B and C as his qualifying relatives, provided all other requirements of sections 151 and 152 to qualify for the deduction are met.

Example 2.

Same facts as Example 1, except that B has earned income of $1,500 during the taxable year 2006, had income withheld from her wages, and is not required by section 6012 to file an income tax return. With one qualifying child, B may claim the earned income credit (EIC) in the amount of $519 for the taxable year. B files an income tax return solely to obtain a refund of withheld income taxes and does not claim the EIC. Accordingly, because B does not have a filing requirement and filed only to obtain a refund of withheld income taxes, C is not a qualifying child of B or any other taxpayer, and A may claim both B and C as his qualifying relatives, provided all other requirements of sections 151 and 152 to qualify for the deduction are met.

Example 3.

Same facts as Example 1, except that B has earned income of $8,000 during the taxable 6ear 2006, had income tax withheld from her wages, and is not required by section 6012 to file an income tax return for the taxable year. With one qualifying child, B may claim the EIC in the amount of $2,729 for the taxable year. B files an income tax return for the taxable year to obtain a refund of withheld income taxes and B claims the EIC on the return. Accordingly, because B filed an income tax return to obtain the EIC, and not solely to obtain a refund of withheld income taxes, C is a qualifying child of another taxpayer, taxpayer B, and A may not claim C as a qualifying relative.

The effective date of this notice is for taxable years beginning after December 31, 2004, tax professionals and their clients who did not claim dependency exemptions due to the prior interpretation may wish to review and file amended tax returns for 2005 and 2006.

NOTE: IRS Notice 2008-5 addresses dependency exemptions in a particular set of circumstances. It does not address issues of Child Tax Credit or Head of Household filing status.

S. Raines, Sr. Financial Advisor/Tax Preparer

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