1. Hoffman and Smith CPAs
5191 Natorp Boulevard
Mason, OH 45040
March 6, 2013
Mr. Donald Dewey
4321 Mt. Vernon Road
Dover, DE 19901
At the recent Chamber of Commerce meeting, you asked me about the tax advantages of having Van, your son, claim Debra, your daughter, as a qualifying child.
If Van can treat Debra as his qualifying child, he qualifies for a dependency exemption, the child tax credit, and the earned income tax credit. On the other hand if you claim Debra, the only benefit available is a dependency exemption—your income is too high to permit the use of either the child tax credit or earned income tax credit. A dependency exemption yields a greater tax benefit to you than to Van, but the tax saving is by far outweighed by the unavailability of the two credits. Consequently, the family would save taxes if Van claims Debra as his qualifying child. In such a case, you would have to forgo the dependency exemption for Debra.
Until 2009, the procedure suggested in the preceding paragraph was permissible. However, in the Emergency Economic Stabilization Act of 2008, Congress changed the rules. Under current law, another eligible taxpayer may claim a person as a qualified child only if he or she has an adjusted gross income (AGI) higher than the highest AGI of any of the person’s parents. Clearly, the new condition eliminates Van because his AGI ($16,000) is not higher than the AGI of both you and Mary. Therefore, regardless, of any willingness to waive claiming her, Debra is your qualifying child.
As per our agreement, I am enclosing a statement covering the charge for my personal services. If I can be of further assistance to you in this matter, please feel free to contact me.
William C, Dodd, CPA
NOTE TO INSTRUCTO
The relevant Code provisions are: § 24 (child tax credit), § 32 (earned income tax credit), § 151 (dependency deduction), and § 152 (dependent defined). The amendment to the Code referred to in the letter was the addition of § 152(c)(4)(C).
Although not called for by the facts of the problem, Van is not Don’s qualifying child (because of the age test) or qualifying relative (due to the gross income test).
2. a. Hoffman and Smith CPAs 5191 Natorp Boulevard Mason, OH 45040
March 6, 2013
Mrs. Sophie Durbin
1310 Ash Street
Kearney, NE 68849
Dear Mrs. Durbin:
This letter is in response to the inquiry as to your filing status and related tax matters for tax years 2010 and 2011. According to the information provided to us, you filed for 2010 as married filing separately and are unsure as to what filing status to choose for 2011. Also, for 2010 you did not claim either your son or mother-in law as dependents.
Normally, married persons who do not file a joint return must file as married filing separately. This is an unfortunate result because the tax consequences may be less desirable. There, exists, however, a special classification called abandoned spouse that allows a married person to be treated as being single. Single persons can qualify for head of household filing status. The tax rates applicable to head of household are lower than those relating to married persons filing separately.
One of the requirements for being an abandoned spouse is that the taxpayer maintains a household for a child that is a dependent. The first condition you satisfy as to Ryan for all years involved. With reference to dependency status, however, age and student status makes a difference. If Ryan is 19 years or older, he cannot qualify unless he is also a student. This is the case for 2010 (and probably for 2012) but not for 2011. Thus, you are an abandoned spouse for 2010 (and probably 2012) but not for 2011.
As to the dependency exemptions, your husband has no right to claim either Ryan or Isabella. You provided for their support and maintained the household in which they lived. You may claim