tax help for a friend

[Jack]

A friend of mine has a tax problem and I told him I'd ask here to see if anybody knows the answer. He lives with his disabled boyfriend.

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I've used TurboTax.com this year (as I usually do) but this year I did something different, and after much review, I'm being told by my mother that what I did could cause an audit or raise a red flag.

What did I do that was so henious?!

I claimed my medically disabled non-working boyfriend as a dependent.

In 2004 he hasn't work for any taxable income. He has, however, received compensation from the VA for his medical discharge and 20% disability rating. During some parts of 2004 he was in school under the Chapter 31 program.

I thought carefully about doing it, and the only provisions TurboTax stated that I must meet in order to qualify him as a dependent are:

* Must have earned less than $3100 taxable income during 2004
* Must have lived with me (minus temporary absenses) for all 12 months of 2004
* I must have paid for at least half of his expenses in 2004

So TurboTax says one thing, but my Mom says another. Shes good with taxes, so now I'm in a bind. She says I will get audited and possible fined since the IRS frowns about claiming dependents who are not related to you, and states that my BF isn't my spouse because the state won't even recognize such a union.

I'm a little lost and a little stressed now. She says it isn't too late to file a 1040X, but I'm not sure if I should or not. Claiming him didn't increase my return, but eliminated his need for filing one himself (besides, I don't even think he needs to since he didn't even have income in 2004.)

Does anyone have any good ideas on what to do? I don't mean to dismiss my Mom's advice, but I'm stuck here and open to anyone's ideas (including hers.)

[avanutria]

If it didn't increase your friend's return, and doesn't affect his boyfriend's return due to zero income, they might as well file seperately. When I was in school I learned that if I were claimed as a dependent on someone else's taxes, it negatively affected my elegibility for government financial aid, but that was because I was classified as an "independent student". If they file together, they might discover that it causes a problem down the line.

I'm no professional though. Tell your friend not to stress, there's loads of time before end of tax season.

Edited to add - there's no harm in filing with zero income...it takes only a few minutes to fill out the form. One year I made about 50 bucks, but I still filed. I even have to file when I'm not living in the US, now that stinks.

[jkrazy52]

Cranberry, I think you friend should have no problem by claiming his BF as a dependent ... if he falls under the income stipulation, they've lived together all year, and your friend has provided over 1/2 of his support. To avoid the "not in violation of local law", your friend hopefully claimed himself as "Head of Household" and simply listed his BF under "dependents" as a 'friend'. It's the way he would be advised to file in our tax office ... and I've been doing this since 1979 and my Dad has been a tax consultant over 50 years.

Hope this helps!

~Judy

[dubhlinn]

I've been wondering about the Taxation system in America.
Do you folk have your taxes deducted at source every week/month or do you make a declaration and then wait for the Bill to pop into your letter-box.
Over here,and in Ireland,you have a tax free allowance of £XXX pounds per year and this is spread over your annual earnings on a weekly/monthly basis and a percentage of all monies above this figure is deducted at source,hence no Tax bill at the end of the year.
Obviously there is a different system for those classed as Self-employed.

Slan,
D.

[avanutria]

Here's my understanding of it, as a taxpayer with no legal or IRS training.

Every paid job can fall into one of two categories:

1) under the table or cash in hand - you do work, you get cash or check for it, you go home. This is frowned upon, both because the government doesn't know how much it is supposed to get and also because whatever you earned isn't counted toward the social security payments you get when you retire. (Anyone my age is not going to get social security when they retire - it's not going to survive that long.) In fact I believe it's so frowned upon it is illegal, unless you report it during your tax filing.

2) Payroll. This means that you get a check from your employer every certain period of time (could be a week, two weeks, a month, etc). There is already some tax taken out of this check. Some for state taxes (unless you are working in a state that doesn't take state tax, like Washington state), some for federal tax, and some for Medicare or something. Federal takes the most, State takes next most, and Medical stuff doesn't take much at all. (This isn't for personal health insurance - if you have that, it'd be seperate.)

The amount taken off your payroll depends on how many exemptions you declare when you start the job. You follow the instructions on the top of the form and end up with a number: 2, 3, etc. It's supposed to be an estimate of the tax range you'll fall into. If you expect it to be higher or lower than the form makes it, you can change it. The number you use will determine how much tax is taken out of your payroll check.

The US tax year is by calendar year, Jan 1 to Dec 31. Tax day is April 15. You have from Jan 1 to April 15 to sort out your mess from the previous year. Each of your payroll employers sends you a tax form called a W2, which states how much tax they've removed from your earnings. (I'm in the process of trying to track down my two from last year.) They also send a copy to the government. You use the info on the forms while filing your tax return to determine how accurate the estimate was. If you didn't make much (say you didn't hold the full time job for the whole year) then you'll probably get a tax refund. If you did really well that year you might have underpaid and you'll owe taxes instead.

It's the one time of year that it's a 'benefit' to have had employment trouble. You get a nice bit of your money back. I *always* have employment weirdness, so as soon as I get my W2s I will know how much I'm getting back this year.

Technically, you would probably be better off underpaying and owing tax, as you get to hang onto your money all year and earn interest on it. If you overpaid and get a refund, the government's been getting the interest off your earnings.

Oh yeah - when you file taxes, you file one return for Federal taxes and another return for any state you worked in and were taxed for. I move around so much that I commonly have to file for two states, and once I filed for three! There are many places to file Federal taxes online for free (especially if you have little income) but I haven't come across anyplace for free state filings yet.

[Jack]

Thanks yall.

[Lambchop]

Over here,and in Ireland,you have a tax free allowance of £XXX pounds per year and this is spread over your annual earnings on a weekly/monthly basis and a percentage of all monies above this figure is deducted at source,hence no Tax bill at the end of the year..

Well, yes, theoretically this is supposed to be how it works. If there are no other factors factoring in, this would be the case. However, there is a complicated system of deductions applied to the annual earnings to reduce the tax obligation. The actual annual income isn't known until the end of the year, and the actual amount of the deductions isn't known, so an accounting is made of them at the end of the year, following which one receives a refund, pays a bit more, or pays a lot more and some penalties if it's a whole lot more.

Income tax isn't calculated as a flat percentage of gross earned income; everyone doesn't pay 30%, for instance. It's calculated on what remains of your income after certain things have been removed. If you pay state taxes, for instance, those are deducted before the federal taxes are calculated. If you have children, you get an extra tax-free allowance for them. If you have medical expenses exceeding a certain amount or home mortgage interest, you get deductions for that. If you have unreimbursed employee expenses or expenses involved in keeping yourself able to perform a certain type of job they are deductible in some form.

This can be easy or it can be a real pain, depending on your circumstances. There is a whole industry, which operates primarily between January 1 and April 15 of each year, to prepare tax returns. Because I have a regular job and I'm self-employed, and occasionally work in an odd employment catetory known as a 'statutory employee' (telecommuters working for companies in distant states, usually) with business use of the home and computer depreciation and other things requiring preparation of some additional forms, my taxes are annoyingly complicated.

About ten years ago, the federal government re-did the tax stuff to make it easier for the Average Joe to understand. I had understood things just fine up to that point and could do them with a pocket calculator. In fact, I could volunteer to do them for others. With the changes, I became completely unable to do my own taxes. That year, after calculating that I owed more in taxes than I had earned during the year, and having had every commercial tax preparer in town refuse to do my taxes because they were "too complicated," I became despondent and, overwhelmed by the horror of it all, burst into tears in my hairdresser's chair. He phoned up his accountant who, amazingly, turned out to be the only one in town who knew what a statutory employee was. I will now gladly pay this person any amount of money to handle my accounts. If anything ever happens to my accountant . . . I have a contingency plan which involves moving to a foreign country.

[Lambchop]

In 2004 he hasn't work for any taxable income. He has, however, received compensation from the VA for his medical discharge and 20% disability rating. During some parts of 2004 he was in school under the Chapter 31 program.

Cranberry, as an aside, he should check with the veterans service organizations in his area to see if they provide tax preparation assistance. They often know of accountants who volunteer at the VFW, etc., to help vets out with their taxes.

Also, if he has not already done so, he should check with the same folks to have them review his claim and make sure he's getting what he's entitled to by way of compensation. Compensation ratings can be changed (increased) over the years, particularly if a problem develops as a result of the initial trouble or if the initial problem becomes more debilitating.

They're often located in the vicinity of veterans medical facilities, often on the same grounds. If you don't know who they are, you can ask a local vets group, like the VFW, if they know.

[avanutria]

...If anything ever happens to my accountant . . . I have a contingency plan which involves moving to a foreign country.

No good, Peggy, expatriate Americans still have to file taxes!

[kkrell]

A friend of mine has a tax problem and I told him I'd ask here to see if anybody knows the answer. He lives with his disabled boyfriend.

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I've used TurboTax.com this year (as I usually do) but this year I did something different, and after much review, I'm being told by my mother that what I did could cause an audit or raise a red flag.

What did I do that was so henious?!

I claimed my medically disabled non-working boyfriend as a dependent.

You definitely cannot file as Head of Household. They will require an explanation of the relationship (child, blood relative, etc.). Boyfriend or Domestic Partner not a valid choice. In such a circumstance, expect to file an amended return (with a higher tax paid) and be assessed penalties.

Kevin Krell

[TyroneShoelaces]

Cranberry, I think you friend should have no problem by claiming his BF as a dependent ... if he falls under the income stipulation, they've lived together all year, and your friend has provided over 1/2 of his support. To avoid the "not in violation of local law", your friend hopefully claimed himself as "Head of Household" and simply listed his BF under "dependents" as a 'friend'. It's the way he would be advised to file in our tax office ... and I've been doing this since 1979 and my Dad has been a tax consultant over 50 years.

Hope this helps!

~Judy

i wouldn't be so quick about passing out legal advice on matters like this. i am not a tax attorney, either, but i do know that situations like this can be a real sticky situation when it comes to insurance law and other areas - i would not be surprised if tax law was any different. this is the precise reason that many are pushing to change the laws on same-sex marriage. the way the laws are currently worded in most states, gay and lesbian couples and their dependents are not afforded the same rights and protection in domestic issues.

[Jerry Freeman]

I'm not a tax expert, but I've had to look up a lot of stuff on www.irs.gov in figuring out my own taxes, so I thought I would see if I could find any relevant information that way. Here's what came up:

Dependent. A person, other than the taxpayer or the taxpayer's spouse, for whom an exemption (defined later) can be claimed. You can generally claim an exemption for a dependent if the dependent:

Lives with or is related to you,

Is a U.S. citizen, a U.S. resident, or a resident of Canada or Mexico,

Does not file a joint return,

Does not have $3,100 or more of gross (total) income (does not apply to your child if under age 19 or a student under age 24), and

Is supported (generally more than 50%) by you.

Here's what it says about who can file as Head of Household:

Head of Household
This filing status is for unmarried individuals who provide a home for certain other persons. (Some married persons who live apart may also qualify. See this page.) You can check the box on line 4 only if as of December 31, 2004, you were unmarried or legally separated (according to your state law) under a decree of divorce or separate maintenance and either 1 or 2 below applies to you.

You paid over half the cost of keeping up a home that was the main home for all of 2004 of your parent whom you can claim as a dependent. Your parent did not have to live with you in your home.

You paid over half the cost of keeping up a home in which you lived and in which one of the following also lived for more than half of the year (if half or less, see the Exception on this page).

Your unmarried child, adopted child, grandchild, great-grandchild, etc., or stepchild. It does not matter what age the child was. This child does not have to be your dependent. If the child is not your dependent, enter the child's name in the space provided on line 4. If you do not enter the name, it will take us longer to process your return.

Your married child, adopted child, grandchild, great-grandchild, etc., or stepchild. This child must be your dependent. But if your married child's other parent claims him or her as a dependent under the rules for Children Who Did Not Live With You Due to Divorce or Separation on page 18, this child does not have to be your dependent. In this case, enter the child's name on line 4. If you do not enter the name, it will take us longer to process your return.

Your foster child, who must be your dependent.

Any other relative you can claim as a dependent. For the definition of a relative, see Pub. 501.

Best wishes,
Jerry

[Lambchop]

...If anything ever happens to my accountant . . . I have a contingency plan which involves moving to a foreign country.

No good, Peggy, expatriate Americans still have to file taxes!

Well, then I'll have to become a nun.

[kkrell]

Jerry,
Good quotes. As can be seen, that "Head of Household" section has a strict definition of the type of dependent that can be claimed. Believe me, the questionaire that the IRS will send for clarification on this issue does not have alternative choices. The case we've been discussing does not qualify.

Kevin Krell

[TyroneShoelaces]

i wouldn't be so quick about passing out legal advice on matters like this. i am not a tax attorney, either, but i do know that situations like this can be a real sticky situation when it comes to insurance law and other areas - i would not be surprised if tax law was any different. this is the precise reason that many are pushing to change the laws on same-sex marriage. the way the laws are currently worded in most states, gay and lesbian couples and their dependents are not afforded the same rights and protection in domestic issues.

I'm not a tax expert, but I've had to look up a lot of stuff on www.irs.gov in figuring out my own taxes, so I thought I would see if I could find any relevant information that way. Here's what came up: ...

Here's what it says about who can file as Head of Household: ...

thanks for the definitions, mister freeman. i was rushed this morning and did not have time to search the proper citations for the tax code. as i suspected, the tax code provides definitions for domestic issues which keep in line with all other aspects of the law concerning that topic. as your definitions point out, there is no legal relationship existing between the boyfriend and his "dependent," thereby precluding the boyfriend from taking the disabled gentleman as a dependent on his taxes when filing as the head of the household. these laws reach into other areas of our lives as well. for instance, just try to force an insurance carrier to recognize this type of situation when determining if the individual is a legal dependent or spouse under an insurance policy.

this is why i said in my original post that people cannot dish out legal advice willy-nilly. (the law is not always the way the layperson would like for it to be.) engaging in this activity may end up harming the person you are trying to help, and you also could find yourself in hot water for dispensing legal advice without a license. attorneys and judges (who are also attorneys) tend to frown on that sort of thing.