Tax law question.

[lime]

Hi,

I am not sure if this is the right place to ask but if not, perhaps you can point me in the right direction.

I have full physical costody of my 13 year old son from a previous marriage. I now live with my fiance and we have a two year old that I have been staying at home with for the past two years. Last year, when we went to file taxes, we learned that my fiance can claim me as a deoendant but not my 13 year old. He has been the one to support this child, I do not understand this law but in any case...

I could not file taxes and calim him because I had no income. Who do they think is feeding the kid? So we were thinking, can HE pay me to be the babysitter of his (our) two year old? I mean, he calimed him and the cost of him on last year's income tax.

Our plan is that he would pay me weekly, take out social security etc...and then he would claim it as a childcare expense ad he would claim the two year old.I would be able to file taxes, because I would have income, and I would claim the 13 year old.

Is this legal? I do not see any reason it should not be. It is the same as having a nanny. My poor finace paid 13 thousand dollars for my 13 year olds private school last year, spent endless hours helping him with homework and being a "dad" and all on a professor's salary or 45 thousand. Then the IRS says he can't claim him? This is some puritan law to encourage marriage so that the goverment does not have to pay welfare, which in other countries is called...being human.

End rant. Thanks for the insight. If this works, all unpaid stay at home mothers may want to get divorced and get paid for caring for their children.

-lime

[Nascar3]

If he pays child support he should be able to claim him as long as you authorize it. There is a specific form for this that you would need to sign.

Oh, pardon me.....I thought you were talking about your EX claiming your son. So sorry. Guess I need to pay attn more while reading! *embarassed*

[sfc1124]

My understanding is that he can claim the child but not for earned encome credit purposes. He has to put down in the relationship field "other" instead of son or daughter. I could be wrong, but that is my understanding. We used to own a tax prep business. My mother-in-law still has one and she is an enrolled agent.

[txtrouble]

Hi Lime,

I'm not an atty or tax expert but here are my thoughts. I don't think he'll be able to claim dependent care exemption on his return. Here is why I think this is: For one, you two aren't married. He has no legal relationship to your son (unless he has adopted him). So how can he claim this exemption? There are certain relationship tests the IRS has, one of them is a stepson/stepdaughter or of course adopted. In the IRS' eyes, its like if I just paid a stranger money (say they have a child) and deducted child care credit. Of course, I understand he does provide support, but in the IRS' eyes, I don't think there is a distinction.

Another point, to take child care deductions, both parents have to be working I believe. I got hit with this last year. I put money in a dependent care spending account (one of those tax free accounts) for my daughter. My wife doesn't work. But when I filed my tax return, they didn't allow this deduction b/c both parents have to work. So I had to pay back taxes (money is a spending account comes out pre-tax, so it lessens your taxable income).

Those are my thoughts. But I think the biggest hurdle is that your fiance does not have any legal relationship with your son, thus he cannot take any deductions, in my opinion.

[txtrouble]

Hey Lime,

One more point. Again, I'm not an expert BUT aren't there tax credits for children? Meaning even if you don't have income, you still can get money back? I could be wrong, but I thought there was a tax credit for a child. A tax credit is very different that a tax deduction. A tax deduction lowers your taxable income, so yes, if you have no income, this does you no good. However, a tax credit lowers your taxes owed, big difference.

http://www.irs.gov/newsroom/article/0,,id=106182,00.html

Also, I might stand corrected on what I said above. Check out the link below. Your fiance may be able to claim your son as a dependent after all. I don't think he can deduct his school tuition - if you find out he can, tell me how so I can do the same! The main point this guy makes in his article is that it depends on what the father of your son is doing. Is he claiming him as a dependent? If so, that could create problems, but it doesn't mean your fiance can't do it. See what everyone else chimes in with.

http://taxes.about.com/b/a/236770.htm

[lime]

I may have not been clear. It sounds like my fiance can't claim the cost of childcare but does that mean he can't pay me?

I will try to be clear, as this is a complex situation.

I have two children by two diffrent men. The first is 13 and I have full physical custody but his father does pay some child support. (Not enough to consider it "fully" supporting the child though.) The 2nd child is two and I live with his father, as does my 13 year old son. We are not married and I do not work.

So, if he pays me as his nanny, and takes out taxes and social security etc. I should be able to file taxes then, right? He will NOT claim any childcare cost on his taxes.

He will file and claim our two year old as his dependant.

I will file and claim my 13 year old as my dependant.

I do not see how this would be any diffrent than my going to work as a nanny and caring for the next door neighbors child, so long as I pay taxes. I am not claiming the two year old as my dependant. If I did work for the next door neighbor and we hired a nanny to care for our son, it would be totally legal for me to file and claim one child, he file and claim another and then, he WOULD be able to claim child care cost.

In our case, we will not push our luck and he will not claim child care cost. However, due to how little I would pay in taxes and the fact that he only makes 45k a year, we would come out way ahead this way.

For starters, we could claim the 13 year old we support. We would both qualify as head of household and I would qulify for earned income credit. We would get several thousand dollars extra back this way. The money he paid me would stay in our house and we would get back far more than I paid in taxes at the end of the year.

I can register as a child care provider and make it so I am legal with the state. I know this seems too good to be true, so I am questioning if it is possible, but I can see no reason it is not. I mean, no one ask whose children you are caring for, they just see that you paid income taxes on money you were paid. Even in the worst case senario, even if we were to be audited, I still see no reason this is illegal.

It is on the line and it will anger the IRS, sure. So what? I am angry too because if everything in our situation were the same...except we were married, we could claim the 13 year old. I feel this is some puritan thing that our country has to try to get people to marry. Which is ofcourse so that the government does not have to pay welfare, the father does.

In this case, my fiance is doing more than the childs father is and he is being penalized because we have not gotten married yet? Leglly? The funny thing is, the reason we are not married is because we do not have the money to get married!!!! We do not want a "justice of the peace" wedding and rather decided to wait until we could afford to get married. This was even before the baby. Perhaps then, if people could afford to live in the country, more would get married!!

So, back to my question, can anyone see why this would not be legal?

Thanks!!!

-lime

[txtrouble]

Hey there Lime,

Okay that makes a lot more sense now. As I understand it, you basically just want some income so you can file a return? If that's the case, then I dont' see a problem with your fiance paying you money, withholding the proper taxes, and you filing. You shouldn't even have to get a day care provider license or anything like that. Here are some potential issues:

1. Can you both file as head of household? One of the qualifying tests to be able to file as a head of household is that you pay more than 50% of the household expenses, or "keeping up a home". Since you live with your fiancee, by math, only one of you can be paying over 50% of the expenses. HOWEVER, I'm wondering since you two are not married can you say you have two different households even though you live in the same home? I'm not sure.

But to answer your main question, your fiancee can pay you for whatever reason he wants to. Obviously you perform services such as maintaining the house while he goes to his job, care for the child, etc, so he can legally pay you a salary. You don't even have to justify it. I assume you want to get the day care provider so he can deduct child care expenses? This can get tricky. I don't know about being unmarried, but I do know that if you are married and only one person works and the other stays at home, you CANNOT deduct child care expenses. At least I wasn't able to. However, I'm not sure how it works since you are unmarried and you two have a child together, maybe you can, but I'm not sure. It may still have to pass the test where both parties work. My advice to you is to call the IRS. They can be actually helpful believe it or not and can answer your tax questions. Honestly, before listening to me, you should check with the IRS to see what htey say. Explain your situation. They should be able to tell you what you can and cannot do.

I do feel your pain with the IRS, I don't like them either. But I do disagree with one point that they encourage marriages. The way the tax code is right now, you actually get penalized for being married. Your standard deductions for a married couple are LOWER than if you were single and filing separately. So they definitely aren't encouraging marriage with the way the laws are written. But the bottom line is the IRS doesn't really care or have a motivation beyond collecting their money. They want their money and they want it timely.

The IRS can really turn your world upside down so I strongly advise that you either call them (free) or if you can afford it, see a tax attorney or a tax advisor. But you shouldn't need to pay, give the IRS a call, they should be able to answer your question. I don't want you listening to me and I was wrong, then you get audited and ahve the pleasure of paying some late penalties and fines.