Bad Tax Advice!

Bad Tax Advice: “If it is not his daughter, and you’re not married, legally he cannot claim her!! 2 years ago when I was with my husband before we got married, he tried claiming my son as a dependent an HR Block would not allow him to do that”

This Well Meaning Internet Stranger ™ is actually closer to the truth than many people. The IRS recognizes two kinds of dependents: Qualifying CHILD and Qualifying RELATIVE. Interestingly, the “child” and “relative” portions of the titles are misleading. I can claim someone who isn’t my child as my Qualifying Child. I can claim someone who isn’t related to me at all as my Qualifying Relative. Conversely, there are times when my child (who I support) CANNOT be my Qualifying Child, and my relative (who I support) cannot be Qualifying Relative. Fun, right?

To find out who is what, you have to look at a set of tests. We usually start with Qualifying Child, because it’s a lot better to have one of those tax-wise. The tests are: relationship, age, residency, support and joint return. So, for the WMIS ™ above, let’s assume that she had a kid from a previous relationship (Kid), and is now living with, and being supported by, her boyfriend (Boyfriend). At tax time, Boyfriend wants to claim Kid, as he’s been supporting Kid, so we look at the rules for QC. First one is the relationship rule, which say Kid has to be related to you as your descendant (including relationships by marriage or adoption, like step child, foster child etc), your sibling, or the descendent of your sibling. BAM! Kicked out of QC status! Kid is not related to him. Of course, Boyfriend could change this, by marrying her, and/or adopting her kid. But he didn’t, so for this tax year, he CANNOT claim Kid as his Qualifying Child.

BUT…..can Kid still be his Qualifying Relative? YES! Guess who else he may be able to claim? Kid’s mom! Did they live in the same house all year? Did Boyfriend provide more than half of the support for Girlfriend and Kid? Did Girlfriend (or Kid) have gross income for the year of less than $3,950? Then it’s very likely that both Kid and Girlfriend will qualify to be Boyfriend’s Qualifying Relatives. Having Qualifying Relatives won’t get him Head of Household status, and won’t qualify him for Earned Income Credit (unless he would qualify without any dependents due to income under ~$14,000). But if Boyfriend is in the 15% tax bracket, the estimated cost of following Bad Tax Advice could be around $1,200 Federally and $800 for Oregon.

Bad Tax Advice: “My tax accountant told me that if you make less then $10k a year you do not have to file taxes.”

Whoops.

In the most basic situation, this may be true, but even when it’s technically true, it may still be Bad Tax Advice.

The IRSs publication does state that for air quotes MOST air quotes taxpayers, you do not need to file if you earned less than $10,150. There are lots of exceptions to this though. If you earned Self-Employment (SE) income of more than $600 in the year you must file. That’s right. And a lot of people don’t know they are self-employed. Did you watch your friend’s two kids in your home a few times a month? You may be self-employed! Did you sew felt woodland creatures and sell them on Etsy? You may be self employed! Did you build a couple of WordPress sites for your friends  for cheap because you coworkers said you were good at it? You may be self-employed! And if you are self employed, you MUST file a tax return if you have $600 or more in SE income in the year. Estimated understatement of tax: $1,500 Federal + $300 Oregon (for a single person, Oregon resident, with $10k in SE profit, plus possible county and local taxes).

What if someone else is claiming you on their taxes? Then that ~$10k above drops down to $6,200 in earned income. If you have un-earned income, like investment income or Tribal per-capita payments, you must file if you have more than $1,000 in unearned income. (LOTS more rules here!) Estimated understatement of tax: $300 Federal + $400 Oregon (based on a dependent with $10,000 of earned W2 income).

Even if you meet the requirements to be exempt from filing a federal return, you may need to file a state return. Which means…you need to file a federal return (since we need that before we can generate a state return)! For Oregon, a single person with regular W2 income, not a dependent, must file a tax return if their gross income is $5,695 for 2013 (most recent year available). So even if you didn’t make enough to have to file a federal return, you start paying taxes sooner in Oregon and need to file with a lower income. Estimated understatement of tax: $400 Oregon.

What about the other direction? What if you determine, after searching through Publication 501 and Oregon Publication 17 1/2,  that you really actually DON’T have to file? That Well Meaning Internet Stranger ™ was right after all? You might WANT to file anyway. If you had any taxes withheld, you must file to get them back. If your income is really that low, you may be eligible for the Earned Income Tax Credit. If you are single with no children, that’s $349 in Federal refunds and $21 in Oregon refunds you miss out on by not filing. If you have a kid a Qualifying Child (more on that distinction later), you miss out on $3,305 in Federal refunds, and even more if you have 2 or 3 Qualifying Children! Estimated cost to you: $370 – $6,511 in Federal and State refunds, plus anything you had withheld.

Want to read about it for yourself? IRS Publication 501 discusses Federal filing requirements; Oregon Pub 17 1/2 is where you will find Oregon filing requirements. Or, you know, talk to your tax person.