Questions for the Tax Lady: November 1st, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Tax-Related Question: Can I claim my daughter who is 34 and has had no income for 3 years, I have been supporting her and not claimed her before. I was wondering if I could use her for a tax deduction .

Answer: You might be surprised how many people are asking this question these days. With the economy still stalled out and new jobs tough to find, more families are turning toward multi-generational living. Of course, there are tax consequences for every life choice, and helping to support financially your adult daughter is certainly no exception.

Let’s get down to brass tacks. Of course, like all tax questions, before you make a move you are not sure about, you need to speak with a tax professional who is familiar with your specific situation. That being said, you should be able to claim a dependent exemption for your adult daughter under the “Qualifying Relative” rules.

The requirements are:

• The person you are claiming as a dependent cannot be your qualifying child or the qualifying child of any other taxpayer. (Since your daughter is over the age of 24, she is not your qualifying child for tax purposes. Instead she is a qualifying relative see the IRS Publication 501 http://www.irs.gov/publications/p501/ar02.html#en_US_publink1000220868 for more information.)
• The person either (a) must be related to you, or (b) must live with you all year as a member of your household² (and your relationship must not violate local law).
• The person's gross income for the year must be less than $3,650.
• You must provide more than half of the person's total support for the year.

From the information you provided, looks like you will be able to claim a dependent exemption for your daughter, valued at $3,650 of exempted income for 2010. This means you may also be able to claim deductions for certain expenses incurred in supporting her. Check with a tax professional to see what you may claim.

Question: Isn't paying taxes voluntary?. I haven't files a tax return since 2004. I've done research on the Internet on how many cases the IRS has lost because that cant prove in writing or any law that says the government can tax someones labor. Nor can the IRS prove in writing the law that says one MUST file a tax return. I'm thinking of filing a law suit against them and use the precedent regarding the FEDX pilot and others I've seen on the Internet. Can you help me. The IRS levied my bank account on 10/27 and my kids are hungry.

Answer: I’m glad you asked this question.

Every so often I run into someone who is under the misconception that they do not have to pay taxes. Here’s the bottom line: we all have to pay taxes.

But let me clear up some essential facts:

The word "voluntary," as used in IRS publications, refers to our system of allowing taxpayers to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them. According to the IRS:

The requirement to pay taxes is not voluntary and is clearly set forth in section 1 of the Internal Revenue Code, which imposes a tax on the taxable income of individuals, estates, and trusts as determined by the tables set forth in that section. (Section 11 imposes a tax on the taxable income of corporations.)

Furthermore, the obligation to pay tax is described in section 6151, which requires taxpayers to submit payment with their tax returns. Failure to pay taxes could subject the noncomplying individual to criminal penalties, including fines and imprisonment, as well as civil penalties.

As to fighting in court, regardless of what information you are finding on the internet, let me tell you that IRS Criminal prosecutions boast a conviction rate over 80%. For a prime example of how tax protesters fare in court, look at Irwin Schiff. Mr. Schiff is currently serving 13 years in prison on a number of tax charges resulting from his protesting the legality of income taxes.

While there is nothing stopping you from filing a lawsuit against the government, assuming you can afford to hire an attorney, or even find an attorney willing to take your case, please think again. Honestly, it is highly unlikely that you would win. People with far more resources have tried and failed repeatedly.

Your best course of action is to work with the IRS to find a workable resolution to your tax debts. To file a tax return every year, pay what you owe, and get compliant as soon as possible. As you have stated, the IRS has already levied your bank account, and they have the power to do more, like garnish your wages, or seize your personal property. You write that your “kids are hungry”, so it appears your family is already suffering. I would advise you not to gamble with their well being by pursuing this further..

For more information on tax protester arguments and the legality of income tax, please review the IRS’s positions on each one found here: http://www.irs.gov/taxpros/article/0,,id=159853,00.html

Questions for the Tax Lady: March 1st, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: If my college student wants to claim himself as a dependent when he files his return can I still claim his as a dependent on my return?

No. If you want to claim your son as a dependent and take an exemption for him on your return then he cannot claim a personal exemption for himself on his IRS tax return. Instead, he will need to check the box on his return indicating that someone else claimed him as a dependent.

Question #2: What should I do if I realize I made a mistake on my tax return that I have already e-filed?

If you make a mistake on your return then you will most likely need to file an amended return with the IRS. You should use IRS Form 1040X, and should expect 8 to 12 weeks for the IRS to process the amended return. For more information, check out this page on IRS.gov.

Tax Tips for Caregivers

Earlier this week the RDTC Tax Help Blog posted this interesting article with tax tips for caregivers. Preparing and filing a tax return is difficult enough for the average taxpayer to figure out, however when providing care to an elderly relative or dependent your tax returns can get even more difficult. Fortunately, as this article explains, the IRS and a few dozen state tax agencies offer lots of credits and deductions to help anyone in this situation.

Claiming a Dependent

In most cases, caregivers can benefit from claiming the person they care for as a dependent. Just remember, you cannot claim an individual as your dependent unless you are providing over half of their support for the year of which you are filing. Additionally the dependent must be either related to you or have lived with you for a full calendar year.

Dependent Care Credit

Since providing care to an elderly relative or permanently disabled friend is more than a full time job, caregivers will often need to hire someone to assist them with the duties. Fortunately, the dependent care credit will allow you to deduct up to 35% of your expenses for hiring such help. Check out IRS Publication 503 for a full run down on the credit, and qualifying factors.

Deduction Qualifying Criteria

The person whom you are giving care to will need to meet certain criteria in order for you take medical expense deductions on their behalf. In most situations you will need to be related to the individual or they will need to be a permanent member of your household, meaning they have lived with you for at least a calendar year. The dependent will need to be a U.S. citizen, and most importantly you will need to have provided more than half of that person’s total support for the tax year. If you are not the only person providing a majority of the care then a multiple support agreement will be necessary.

Multiple Support Agreement

In some cases, more than one person is offering assistance to an individual, which can cause some confusion when tax time rolls around. As a partial solution, the IRS created the multiple support agreement. By filling out IRS Form 2120 – a multiple support declaration – one person in a group of two or more will be allowed to claim the individual in need of care as a dependent (even if they are not the majority care provider), and take the allowable exemptions. This type of arrangement is especially helpful for caregivers who do not make enough money to provide care to a dependent, as this type of situation can raise a red flag in the eyes of the IRS.