Tax Brake with Robert G. Nath, Esq.

The term “child” may have slightly or radically different meaning for purposes of the dependent exemption; head of household status, child tax credit, dependent care tax credit, and the earned income credit.

Good news: The United States Government feels your pain. So much so, that the Treasury Department is launching a major simplification initiative. It will start with a “single definition of child….” This revision takes into account some of the problems of divorced or separated households.

Here's the Department's proposal, in its own words (from a news release):

[Treasury] Secretary O'Neill: "The tax code is an abomination. It runs unnecessarily to thousands of pages. Many Americans hire tax preparers because they cannot understand the forms and instructions and they are afraid of being punished if they make a mistake. We can take immediate steps to restore some common sense to the tax code and make it simpler and more fair."

"One of the unseen consequences of our tax code's complexity is the sense it leaves with taxpayers that the system is unfair and that others pay less tax because of special advantages. When most taxpayers believe that others aren't paying their fair share, compliance with our voluntary tax system begins to fall off - a dangerous proposition for a democracy.

"Simplifying the tax code will reduce taxpayer burden by making it easier for taxpayers to understand and comply with the law, and will increase the sense of fairness--that everyone is being treated the same."

Proposals on the Tax Treatment of Families and Children

The first group of proposals will address the tax treatment of families and children. Topics will include:

• Uniform definition of a qualifying child,

• Determining taxpayers' filing status (e.g., head of household),

• Earned Income Tax Credit, and

• Taxation of dependents.

To see how this can confuse a taxpayer, consider the example of a shared household. Now it is possible for three different family members, who live together for a full year, to claim the same child for at least four different tax benefits:

• The grandmother who provides more than half the costs of maintaining the home in which the child resides could claim head of household filing status;

• The child's aunt who provides over half the child's support and cares for the child as her own may claim the dependency exemption and the child tax credit; and

• The child's mother may claim the EITC.

Yet, none of these women may claim the child and dependent care tax credit, even if they work and pay for the care of the child. To claim that credit, one taxpayer must both support the child and maintain the household in which she and the child reside. Under the proposal, the child's mother (or if the family prefers, the grandmother or aunt) could claim all four tax benefits.

Proposal

Uniform definition of qualifying child
A uniform definition of qualifying child would be adopted for purposes of determining eligibility for the dependency exemption, the child tax credit, the child and dependent care tax credit, head of household filing status, and the EITC. A qualifying child would have to meet the following three tests:

• Relationship--The child must be the taxpayer's son, daughter, stepchild, sibling, stepsibling, or a descendant of such individuals. Foster children placed with the taxpayer by authorized placement agencies would satisfy the relationship test. If the child is the taxpayer's sibling or stepsibling or a descendant of any such individual, the taxpayer must care for the child as if the child were his or her own child.

• Residence--The child must live with the taxpayer in the same principal place of abode in the United States for over half the year. Military personnel on extended active duty outside the United States would be considered to be residing in the United States. As under current law, the taxpayer and child are considered to live together even if one or both are temporarily absent due to special circumstances such as illness, education, business, vacation, or military service.

• Age--The child must be under the age of 19, a full-time student if over age 18 and under age 24, or totally and permanently disabled. However, as under current law, qualifying children (who are not disabled) must be under age 13 for purposes of the child and dependent care tax credit and under 17 (whether or not disabled) to qualify for the child tax credit.

Neither the support nor gross income tests would apply to qualifying children who meet the relationship, residence, and age tests. In addition, taxpayers would no longer be required to meet a household maintenance test when claiming the child and dependent care tax credit.

If more than one taxpayer claims the same qualifying child, then the following tiebreaker rules would apply:

• If only one of the claimants is the child's parent, then he or she would receive the tax benefit.

• If the child's parents do not file a joint return and both claim the child on separate returns, then the tax benefit would accrue to the parent with whom the child resides the longest. If both parents reside with the child for the same length of time, then the benefit would accrue to the parent with the highest adjusted gross income.

• If the child's parents do not claim the child, then the tax benefit would accrue to the claimant with the highest adjusted gross income.