I took a phone call from a fellow awhile back who was absolutely furious about some of the questions his tax preparer had asked him. The preparer had asked a whole bunch of questions about his kids and even asked to see their report card from school. He said, “My daughters are 4 and 2 years old. They don’t even go to school yet!”
So what’s going on here?
It’s all related to an IRS form—# 8867. Form 8867 has to be filled out and sent in with every tax return that has the Earned Income Tax Credit. Now, this form has been around for awhile, but it used to be that a tax preparer was just supposed to ask some questions and you’d keep that information to yourself. Now, the IRS expects you to send the form in with the tax return. If a tax preparer doesn’t complete the form and send it in with an EIC return—the IRS charges a $500 penalty to the tax preparer.
That’s $500 per return. You miss too many of those and you could be out of business. For most preparers, that’s more than what we charge to prepare an EIC return.
Now if you prepare your own tax return, you don’t have to worry about form 8867, it’s only for paid tax preparers. But if you have your taxes done at H&R Block, or Jackson Hewitt, or even me—that form must be completed, and signed, and sent with your tax return. (If your tax return is e-filed, we are required to keep the signed copy in our files.)
And the form seems to ask for more and more information every year. Now there’s a whole section about documents: documents to prove your kids live with you, documents to prove a disability, and documents to prove self-employment income. Tax preparers are now expected to look at a taxpayer’s documents to verify the information on an EIC tax return. School records, like report cards, are usually the easiest thing to use for documentation. Of course, report cards aren’t very helpful when your children aren’t in school yet. No documents, no form 8867. No form 8867, no tax return. No tax return, no refund.
It’s like the IRS is trying to turn regular tax preparers into the EIC police. It’s not a job we asked for, but it’s a regulation that we’re required to enforce. The penalties are so stiff that we’ll all be out of work if we don’t go along.
So remember, if you tax preparer asks to see your child’s report card, he doesn’t care if your son got a D in math or is a straight A student; he’s just trying to help you get your refund.
If you normally use your income tax refund to pay for your Christmas presents, listen up. You’ve got a problem.
First, nobody is doing Christmas loans. Remember when H&R Block and Jackson Hewitt used to provide loans against your refund? Then the IRS changed the “debt indicator” which made it almost impossible for anyone to offer those loans. A few companies provided Refund Anticipation Loans, (the loans where you got your refund in 1 or 2 days instead of two weeks) but they were few and far between. Most people had to wait for two to three weeks to get their refund.
Now the IRS has announced that tax filing will be delayed—meaning that instead of accepting tax returns on January 21st like they had previously announced—they won’t accept returns until January 28th, and maybe not until February 4th.
What does this have to do with Christmas? Well, if you’re putting holiday gifts on your credit card in the hopes of paying it off with your tax refund—you’re not getting your refund until mid to late February at the earliest. If you can’t afford to pay your credit cards without your tax refund—you’ve got a problem.
So what other options do you have? For some people, if you know that you’re going to have a refund on your taxes, you can change your withholding now so that you get more money in your paycheck. If you’re reading this in October or early November, you’ve got a chance to put away some extra cash for presents. If it’s already December by the time you see this—it’s probably too late.
Here’s something else you need to know. If you have your taxes done by one of those corner shop tax companies, they will gladly take your money and tell you that they’re filing your return. You might think that you’re filing on January 3 or 4th, but you’re not. What they’re doing is “stockpiling” your return. They hit a button, it gets sent to a big corporate server, but it just sits there until the IRS says they’re accepting returns.
Why is that important to know? Because people think that they need to file early to get their refunds. But those early returns are often wrong. They’re missing information, or the software’s not fully functional yet. The IRS needs time to work out the glitches and if the IRS is having glitches, so are all the other tax companies. If you have the big green tax company send your tax return to their server and then you discover a problem with it, you can’t take your tax return back. It’s too late. And if your tax return is sent in with a mistake it could delay your refund for weeks, or even months.
There aren’t a lot of options out there for using your upcoming tax refund to pay for this year’s holiday gifts. But you know what? Christmas comes every year. Every year! Once you do receive your refund, it might be the only time in the whole year that you’ve got extra cash. Take some of your refund money and stick it in the bank so you’ve got cash to pay for your 2014 Christmas. Seriously, you never want to be dependent upon the IRS for you to have a Merry Christmas.
I get this question every year. Why did my friend, neighbor, co-worker, relative, etc. get a bigger refund than I did? And the honest answer to that question is: I don’t know, I didn’t prepare their taxes. But here are some common reasons why some people might get a bigger refund than you do.
1. They withheld more. That’s the simplest explanation. Technically, you only get back if you overpaid your taxes. So, people who withhold too much, get refunds. If you get less, that actually means you win because you didn’t over withhold. (But trust me, I know. It really doesn’t feel like winning.)
2. They qualified for the earned income tax credit. EItC is one of those tax credits that you can actually receive even if you didn’t pay anything into the system. But—there are many requirements—most notably you have to have earned income. The EIC can make a huge difference in someone’s refund.
3. College tax credits—the American Opportunity Credit can be worth up to $2,500 on someone’s tax return. If your friend was attending school while you stayed home—that could be part of the difference also.
4. Different filing statuses—if you’re single, you could be in a higher tax bracket than your married friend. Or, if you’re married and your wife is also working—then you could be in a higher tax bracket than your single friend. Even though two people have the same job and earn the same amount of money—their circumstances outside of work could have a huge impact on their tax refund.
5. Different deductions—once again, it all has to do with things that happen outside of work. A person renting an apartment could be paying higher taxes than someone paying a mortgage because of the mortgage interest deduction—or any number of other deductions. There are just too many things to name.
6. Income—The more money you make, the more tax you pay. And people who make a lot of money have to pay the alternative minimum tax or AMT.
So, don’t waste your time worrying about your friend’s refund. The important thing is to think about what your goals are. Do you want a big refund? If so, how big of a refund do you want and what would you do with it?
Or would you rather take home more money with each paycheck? If so, what will you do with the extra take home pay?
But whether you choose a larger refund, choose larger take home pay, or maybe choose some middle ground; our job at Roberg Tax Solutions is to help you pay the least amount of tax while making smart decisions for yourself and your family. As long as you’re doing what’s best for you, it really doesn’t matter what your friends are doing anyway now does it?
I have another blog post about split exemptions. If you’d like more information about that, or if you’d like to know if you should even be doing a split exemption, then you should read that first. Here’s a link to that page: http://robergtaxsolutions.com/2011/11/split-exemption-claiming-one-child-on-two-tax-returns-%E2%80%94-the-legal-way/
This page is about the nuts and bolts of how to actually prepare a return with a split exemption. I’ve gotten a lot of calls and emails asking me how it‘s done. I’m using the 1040.com software package that’s on this website for the example. If you’re using Turbo Tax and have questions, call the 800 number on the box. They have trained experts to talk you through it. (Sorry, Turbo Tax doesn’t pay me so I can’t tell you how to use their product.) If you need Turbo Tax help but don‘t have the box, go to this site and send them an email, they’ll contact you: https://turbotax.intuit.com/support/contact/index.jsp?_requestid=15543
This is how it works in 1040.com
If you are the custodial parent, claiming the head of household status and the EIC, this is what you do:
1. First thing: Once you log into the software, the very first question you get is what is your filing status. You’re going to say Head of Household.
Then you’ll complete the rest of the form with your name and address information.
The next section is the dependents screen. First it asks if someone can claim you as a dependent. If you’re splitting an exemption, then the answer to this had better be “No.”
Do you have any dependents to claim: Yes
Did you pay for the care of a child, etc: Yes if you did, no if you didn’t. When splitting an exemption, the custodial parent is the one who gets to claim the child care credit if your child is in daycare.
Go to the next page.
Now you’re on the forms review page. Under dependents it says “add a form.” Click on that.
On the dependent screen, you are going to fill out all the information about your child; the name, social security number, etc. But in the check boxes below you are going to check the box that says: “Child is not your dependent but does qualify you to file as Head of Household”.
The next section is for Child and Dependent Care Expenses—If you have those complete that section.
The next section is about EIC. Answer those questions. Generally the answers should be NO, NO, NO. Question 13a—where it asks is someone else qualifies to claim this child? Your ex cannot claim EIC—your ex is claiming the dependency exemption, so you should answer NO.
When you finish the screen, it will send you back to the dependents screen again. If you have another child, you’ll add another form. If you’re done, click next.
Then you’ll complete the rest of the program by inputting your wages and other income.
After you’ve input your income information, you’ll be inputting your deductions.
Then you’ll have the state information for your state return.
You’re almost done. There are more questions you’ll need to answer before you finish.
When you get to the part where you “Review Your Return” you want to click on the “Preview Your Return” section. This is where you check to make sure it’s right. This is what to look for:
1. Your filing status will be Head of Household, box 4
2. In the line below it, it will have your child’s name and social security number
3. In the exemptions section, it will show that you have claimed yourself; it will not show your child’s name in that box at all
4. On page 2 of your 1040 form there will be nothing on line 33, or line 39 (the child tax credits).
5. On page 2, if you do qualify for EIC, then there will be something on line 38a.
If that’s how your return comes out, then you’ve done the split exemption correctly.
Note: if you have other children that will not have split exemptions, then you will have names in the dependents screen and probably numbers in the child tax credits line. You might want to do the split child first and check the return, then go back and add the other children.
If you are the parent claiming the exemption and the child tax credit, but not the head of household status and EIC—then here are your instructions.
1. Starting from the beginning, you will first choose your filing status. The split child cannot make your Head of Household so unless you have another child that lives with you; this is not your status. You’ve going to be married or single.
2. When you get into the dependents – dependents information, you will answer the questions,
Can someone else can claim you as a dependent? No.
Do you have any dependents to claim: Yes
Did you pay for the care of a child, etc: No—even if you paid for the child care expenses, since you are not the custodial parent, you are not entitled to this tax credit?
3. In the dependent screen, you will fill out all the information about your child, but the box you are going to check is “Child did NOT live with you due to divorce or separation.” In the section that says “months lived with you” you will answer “zero.” Even if your child did live with you for a few months, check zero here to make the program work.
4. You will check NO under the child care expenses.
5. In the EIC section you will check the box that says, “Dependent is not eligible for EIC.”
6. Next you’ll complete the rest of the tax return like you would any other.
7. When you get to the finish, you’ll want to check your return to make sure your child is listed correctly.
When you review your return, your filing status will be single (or married if you’ve remarried) but it will not be head of household.
You child’s name will be listed in the exemptions section.
You will have a number on one or both of the child tax credit lines.
You will not have anything listed on the EIC line.
If both parents file the split exemption correctly, you should have no problem with the IRS over claiming your child.
Going through a divorce is traumatic. It’s sad. And it’s a royal pain in the behind. On top of all the emotional stuff you’re going through, it can also really mess up your taxes.
Right now it’s 2013 and you and your ex are still married but living apart. The divorce will be final this year, but you still need to file your 2012 taxes. What do you do?
Scenario One: You’ve been apart and on your own with the children for over 6 months.
In this case, you are entitled to claim the head of household filing status, the children’s exemptions, EIC (if your income allows it) and the child care credit of your kids are in daycare. Basically you get everything.
Your ex would only be able to claim Married Filing Separately. That could really hurt him at tax time. That’s not your problem, just letting you know what his status is.
So—bottom line—if there’s a fight, you win. Be aware, that he’ll probably try to claim the kids anyway (I see that all the time.) Your refund could be delayed by 75 days. But, if he files first and you get rejected—don’t quit, you’re the winner.
Scenario 2: Couples who did not split apart until the second half of the year.
If you lived with your spouse at all during the last six months of the year, then you’re not allowed to claim the Head of Household filing status. Your only two options for your filing status are Married Filing Separate and Married Filing Jointly. Until your divorce is final, you cannot claim Single.
If you file separately, you lose the Earned Income Tax Credit. There are other deductions you can lose too, but the EIC is probably the most devastating to lower income taxpayers with children.
The incentive to file jointly in this scenario is much higher than if you’re allowed to claim head of household.
No matter which scenario you’re in, there’s another filing option: Married filing jointly.
First, if your ex is abusive or dangerous to you or your children in any way—don’t go there, stop here and file head of household or Married Filing Separate. Never risk physical danger.
But, if your ex has some redeeming characteristics—think about it, you’ve probably got adorable kids. He’s done something right somewhere along the line. Remember, you’re going to be dealing with your kids’ father for the rest of their lives even if you’ve divorced him. Mercy might be a good option for future family peace.
So, if you’re thinking about filing jointly, first, you prepare your own taxes, as HOH or MFS like above, claiming all of the exemptions you’re entitled to and figure out your refund.
Next, I recommend doing this at a tax place, not on your own—so that you give yourselves a “mediator”, figure what the refund, or tax situation would be if you two filed together.
Then you’re going to “split the refund”. That is, you set it up so that instead of getting one refund check to go into one bank account, you have the IRS send the refunds to your separate checking accounts (so you don’t have to rely on your ex to sign a check or give you money or anything like that.) You do that using the 8888 form. Here’s a link: http://www.irs.gov/pub/irs-pdf/f8888.pdf
BUT—and this is really important: OKAY, I’M CAPITALIZING AND WRITING IT SEPARATELY BECAUSE IT’S REALLY IMPORTANT: You don’t have to split the refund evenly. You make sure that you get the full amount of what you’d get if you filed separately. That’s only fair. If you were the one that supported the kids, paid the rent, etc, especially if you would be allowed to claim head of household, then you should get the whole of that much of your refund.
You make sure that the refund is split the way it should be and don’t leave the tax place until you see that the return has been e-filed. That way he can’t go back and change the dollar amounts.
Remember, you only file with the ex in order to keep him from totally tanking on his taxes because of the married filing separate classification. This might not help him at all—in which case you don’t file jointly.
Sometimes, you don’t want to file jointly with a soon to be ex. Here are some good reasons not to help the ex by filing jointly:
- If he’s in some kind of tax trouble from before—keep away
- If he owes on student loans or child support to a previous family—keep away
- If he’s self employed—he’ll probably owe and is more likely to get audited—that’s a red flag, use your judgment. The EIC you’d get could be used to pay his self employment taxes and your refund probably wouldn’t be high enough to cover what you’d get by filing alone. But if he’s a decent person—and not crooked, the financial benefit to him could be amazing.
- If he’s crooked. Seriously. If you suspect that he has cheated on his taxes in the past, don’t risk having your name tied to his tax return. Walk away.
Divorce isn’t easy on anybody. Make sure you know your rights and what you’re entitled to and don’t be bullied into doing something that’s not legal or in your best interests.
The short answer is no. But I’ve had about 10 phone calls or emails this week with this question, or something similar anyway, so I figured I should post something about it so people will understand it better.
First, EIC stands for the Earned Income Credit (or some people call it EITC for Earned Income Tax Credit, they’re the same thing.) The key phrase here is “Earned Income”. You earn income from a job—like working at Target, or you might be self employed like me. I own my business so I don’t get a W2 but I still earn income.
Social security, welfare, child support, food stamps, VA benefits, SSI, and gifts from friends or family—none of those count as earned income. Neither does bank interest, stock sales or dividends, or rental income. As far as the IRS is concerned, these things do not count as “earned income” for EIC. (I know those Smith Barney commercials say they “earn” their income, but if you’re making money in a Smith Barney account—it doesn’t get you anything for EIC either.)
Alimony—does count as earned income for EIC. Don’t confuse child support with alimony. Child support ends when your kids grow up. Alimony lasts forever or has an end date that has nothing to do with children. Most people get child support, alimony is pretty rare these days.
So if you have a job that gives you a W2—you’re set because the W2 proves your income. If you get alimony, that’s proven by your ex claiming the alimony expense on his tax return. But if you’re self employed—proving your income is harder.
This year, the IRS is demanding that tax preparers have proof of your self-employment income before we can file your EIC tax return. We’ll be fined $500 per return for not having that information. So if you don’t have good records of your income, you might get turned away by your tax preparer.
So the obvious question is—what records do you need to prove your income? The IRS has a list that includes the following: a business license, 1099MISC forms, records of gross receipts, income summary, expense summary, and bank statements.
The 1099MISC is really the best proof of income if you receive those. 1099MISC is given to anyone performing work for a small business that got paid over $600 during the year. If you’re like me, you don’t get 1099MISC forms. Most of the work I do is for individual people, not businesses so I need to prove my income another way. But I’m an accountant—I have all the bank statements and business records and a license to back up my income. It’s what I do for a living. Not everyone is going to have my kind of records.
What do you do if you just clean Mrs. Jones’ house for $50 a week? Or, maybe you helped paint Mr. Anderson’s garage for $200 last spring. It’s all cash, you’re just helping out. Those don’t seem like they’re really jobs but they are. If Mrs. Jones gives you $50 a week for the whole year, then that’s $2,600. Add Mr. Anderson’s $200 and you’ve got $2800. It’s not much but it’s something.
If you’ve been doing odd jobs like that, you’ll need to get some kind of documentation. Put it in writing and have the people you worked for sign it. In the future, you should keep a log of every place you work: the date, the location, the person you worked for, and the type of work you did.
You can’t make stuff up! That’s illegal. And remember, EIC returns with self-employment are an audit target—if you lie about this stuff there’s a really good chance that you’ll get caught.
But, if you really did work and you really do deserve to claim EIC, then you should be claiming it. You just need to make sure that you’ve got your documentation in order so you can prove it.
The IRS has a website full of information about EIC. Check it out: http://www.irs.gov/Individuals/EITC-Home-Page–It%E2%80%99s-easier-than-ever-to-find-out-if-you-qualify-for-EITC
If you usually claim the Earned Income Tax Credit (EIC) then you need to know about the new rules. Although the dollar amounts of the EIC have remained the same, the reporting requirements have changed dramatically. If you have your taxes done by a professional—then you need to be prepared for the additional paperwork.
So what’s different? It’s the new page 4 of Form 8867—Paid Preparer’s Earned Income Credit Checklist (http://www.irs.gov/pub/irs-pdf/f8867.pdf). That’s the form that tax preparers have to fill out and send in along with your tax return. The quick and dirty summary is: if a tax preparer doesn’t ask enough questions and fails to get enough information before submitting your EIC tax return, she’ll be subject to a $500 fine. Ouch. That’s $500 per tax return. A few bad tax returns can put your tax preparer out of business.
So what’s on this page 4? Well the first item is proving that the child you’re claiming EIC for really lives with you. Here’s what you can use to prove your child lives with you:
- School records or statement
- Landlord or property management statement
- Health care provider statement
- Medical records
- Child care provider records
- Placement agency statement
- Social service records or statement
- Place of worship statement
- Indian tribal official statement
- Employer statement
You don’t need to have all of these things, but you’ll need at least one thing to show your child lives in your house. The school records are probably the easiest if your child is of school age. For me, as a tax preparer, I would accept your child’s last semester report card as evidence of residency as long as the report card has your home address on it.
If you are claiming a disabled child, you’ll need to prove the disability. Here are the documents for that:
- Doctor statement
- Other health care provider statement
- Social services agency or program statement
So with a disability, you have a double issue—proving residence and the disability. Although to be quite honest, I suspect that these statements would also include a home address on them and serve a duel purpose.
And if you’re self-employed, you’re going to need to prove you really have some sort of business with the following records:
- Business license
- 1099MISC forms
- Records of gross receipts
- Income summary
- Expense summary
- Bank statements
These records are pretty standard for anyone who is self employed anyway so this shouldn’t be a burden. Bottom line here is—if you have a business, you need to run it like a business and keep proper business records.
In addition to the new paperwork requirements, of course you’re still going to have to show you and your children’s social security cards. Also, if you’re getting a bank product (where you pay for your tax preparation out of your refund) you’ll need to have a driver’s license or state ID card with your correct current address on it.
The IRS has already announced that people can expect their refunds to be delayed this year. For the fastest possible refund, you want to make sure that you’ve got all of your paperwork together before you even head to the tax office.
Be sure to check out http://www.eitc.irs.gov/central/main/ to answer any EITC questions you may have. Or call us and we would love to help.
The Jan Tax Plan
After two weeks of political conventions I thought I’d know a whole lot more about the tax plans for the Republicans and Democrats. Oh, I’ve heard some high minded ideal stuff—but not much in the way of nuts and bolts. If you’d like to do a comparison, you can check out the Tax Foundation’s website to see how they compare and how they compare to the Simpson Bowles plan too: http://taxfoundation.org/article/romney-obama-simpson-bowles-how-do-tax-reform-plans-stack
But since Romney and Obama didn’t give me what I wanted to hear, I decided to make up my own tax plan. To be honest, it’s more of a reflection of problems that I see with tax returns that I actually work on but these are the top changes that I would make if I were in charge.
1. Earned Income Tax Credit: First I’d reduce EIC payouts by 10% per year until it’s reduced by 30%. In order to claim EIC for a child, you’d be required to produce the child’s report card with passing grade. Why the cuts and why the extra requirements? First, the EIC credit is so high right now that it encourages fraud. Currently, the IRS estimates that between $12 to $14 billion dollars of EIC fraud occur every year. If the payout wasn’t so high, the temptation for fraud wouldn’t be so great.
The extra requirements would help ensure that the kids in our communities get a better education. Everybody gives lip service to more education, and parental involvement is key to kids succeeding in school. Well, if your kid is required to pass school in order to get the Earned Income Tax Credit, I think we’d have a whole lot of parental involvement. No report card, no money.
If the child is too young to attend school, a current immunization record would be required. It’s proof that the child is getting proper medical treatment.
One more thing on EIC—if a person is caught fraudulently claiming a child on his/her tax return, the penalty, besides paying back the tax, should be never being able to claim EIC again. Ever! I work with a lot of the EIC fraud victims, I think they’d really like that rule.
2. Self-employment income: If you receive 1099 MISCs and the total amount is less than $4,000—you should have the option to elect to count that as “hobby” income instead of automatically being taxed as self employment. Currently, if you receive a 1099 MISC, it’s counted as self employment and taxed an extra 13.3% on top of your regular taxes. For someone like me, that’s fine. I own my business, I write of my expenses—it’s the way it works. For many people, they have no clue they’re considered self employed. The small amount of income is a hobby or not a real business. $4,000 to me seems to be the break point between hobbyists and business owners.
I say, that if you elect to claim the income as “not self employment” then you can’t write off expenses. If you elect to claim that you’re in a business, you can’t go back later and call it a hobby in later years. That keeps people from jumping back and forth.
3. The Alternative Minimum Tax: This one is my pet peeve. The AMT adjustment was set in 1969 and hasn’t been adjusted. Right now, Congress basically votes for a “patch” every year. Why they wait until December to do it is beyond me. I say that we should adjust the AMT threshold for inflation and automatically adjust it every year to correspond to the rate of inflation. Normal people can’t plan their taxes without knowing about AMT. The fact that this has been going on for so long is ridiculous.
I could probably go on and on but these are my top three. What would you change if you could fix the tax code?
Quick answer: No.
For a longer answer, you may want to know why. Here’s the reasoning: if you are married and living with your family and raising your children—there’s no deduction for paying for their school clothes or feeding them. That’s pretty much what your child support payments are—feeding the kids and paying for clothes. So whether you live with your kids, or live apart, the money that’s used for those day to day necessities is not a tax deductible expense. You don’t get a deduction for paying it and your ex doesn’t claim it as taxable income.
What about alimony? Alimony is different—you get to deduct alimony on your tax return if you pay it, and your ex has to claim the alimony as income. Alimony counts as income so your ex will have to pay taxes on it. Alimony does not count as earned income for the earned income tax credit, but as one of my clients explained to me, “Oh, honey—trust me I EARNED it!”
You might be thinking that paying alimony is better than paying child support—but there’s a catch to that thinking. If the “alimony” ends when the kids turn 18— the IRS will call it child support anyway so you lose all the tax advantages. Alimony basically goes for the life of your ex or until a re-marriage occurs. So while alimony has some tax advantages—child support at least has an end date. (There are some cases where alimony is only paid for a limited time, but it has to be very separate and distinct from any type of child support to be valid for tax purposes.)
Some people pay both alimony and child support. In a case like that you can deduct the alimony portion of your payment on your tax return. Now it’s important to know—if you fall behind on your payments—the IRS assumes that you pay the child support first. For example: Let say you pay $300 a month in child support and $200 a month in alimony. For the year you pay $6000 all together: $3,600 in child support and $2,400 in alimony. You’ll take a $2,400 deduction for the alimony on your tax return.
Now, what happens if you lost your job and didn’t make any payments in November and December of the tax year? You would have paid $5,000 total, right? ($500 times 10 months) And $2,000 of that was for alimony. But according to the IRS—you pay the child support first. So of the $5,000 that you did pay, $3,600 went towards the child support and you only get to deduct $1,400 (the amount that’s left) for the alimony. So make sure that you’re all paid up before the end of the year if you want to deduct all of the alimony on your tax return.
If your hungry for more, try http://www.mentalfloss.com/blogs/archives/135170 to put icing on the cake.
Some people honestly don’t know who does and who does not count as a qualifying child for EIC and they mess it up. But one of the most common types of EIC fraud is someone claiming a child that does not belong on his income tax return. If you make an honest mistake, the IRS agent is probably going to assume you’re committing fraud anyway. So I’m here to keep you out of trouble.
I come from one of those families where we use phrases like, “first cousin once removed.” When I was a child I remember going to a wedding reception and playing all evening with my “cousin”, only to be told later that she wasn’t a cousin, she was my “father’s half-brother’s step daughter.” (Yeah, do the calculation, in any normal family your uncle’s kid is a cousin, right?)
I married into a family that is “we’re all one big happy”. We don’t have steps, or in-laws, or halfs, we’re all brother, sister, mom, cousin, etc. I think most people are somewhere in between. But what we’re dealing with today is the IRS version of family and the IRS version of family goes like this:
Let’s start with you. You are the center of the universe and all family members revolve around you. What we’re trying to figure out here is what counts as a Qualifying Child for you—this eliminates all parents and grandparents and members of their generation.
You may count your brothers and sisters. You must be older than your brother or sister to claim them (unless they are physically or mentally disabled.) You can also include step brothers and
sisters, and half brothers and sisters, and adopted brothers and sisters.
A step sibling means that your parent married somebody else who had kids. There is no blood relation, but there is a marriage license. If your parent did not marry the other person, even though you all live together and think of yourself as one family unit, there is no IRS relationship.
A half sibling means that one of your parents had a child with someone other than your birth mother or father. Let’s say your mom had you and then left your dad for someone else and had a child—that child is your half sibling—you two share half of a gene pool. The counts with the IRS.
Adopted siblings are just that—they’re adopted. There will be court records showing that they were adopted and part of your family. Adopted children are always treated like natural born children for IRS purposes.
These people are all on your even level of the family tree. Imagine you’re standing there with your arms straight out with your brothers and sisters side by side—this is your generation.
Down below your generation is your son, daughter, step child, foster child or a descendent of any of them, for example grandchildren or great grandchildren. Additionally, any descendents of your generation—those are your nieces and nephews (or great nieces and nephews.) So let’s say your half brother adopts a child and he dies and you’re raising that child—that counts as your qualifying child for EIC purposes because he is your nephew.
A foster child is a child who has been placed by an authorized placement agency in your home or by a judgment or decree or court order. No matter what, a foster child has some legal paperwork involved. If your neighbor runs off and leaves her kid behind and you wind up raising her, she doesn’t count as a foster child until the courts come in and say she’s a foster child. This is one of the most common mistakes people make—claiming children they’re taking care of as foster children without the court documents to back it up. Without that legal piece of paper, the child is not a foster child.
Cousins are never qualifying children for EIC purposes.