Tax Brake with Robert G. Nath, Esq.

We briefly explain our conclusions below. During 1997 and 1998, petitioner and Daughter lived in the house belonging to the Peter and Katherine in Jonesboro, Georgia. Petitioner occupied the partially completed basement, and Daughter occupied one of the three bedrooms. Petitioner, Daughter, and the Peter and Katherine shared use of the kitchen and family room.

The amount expended for Daughter includes one quarter of the rental value of the house in which she lived. See Reed v. Commissioner, T.C. Memo. 1980-333. Based on the record we conclude that the fair rental value was $475 per month, or $5,700 per year. The portion expended for Daughter is $1,425 for each year. Petitioner did not pay rent on the allocable portion of the fair market rental value of the house that she and Daughter occupied.

One quarter of the total water, gas, and electricity bills (utility bills) is allocable to Daughter's support. Id. We conclude the total utility costs of both households were $1,392 in 1997 and $1,583 in 1998. Daughter's allocable share of utility costs was $348 and $396 for 1997 and 1998, respectively. Petitioner gave the Peter and Katherine money each month for utilities. The Peter and Katherine paid the utility bills from a combination of petitioner's contributions and their own funds. We are satisfied that the amount expended by petitioner for utilities exceeded Daughter's allocable share.

Petitioner purchased all of the groceries for herself and Daughter. The total amount of support for Daughter includes one-half of the amount spent by petitioner on food. We conclude that the amount expended for Daughter's support was $1,800 in each of 1997 and 1998.

Petitioner paid for all of Daughter's additional expenses including Daughter's medical expenses that were not covered by Medicare, dental care, and clothes. The amounts petitioner spent on these items are included in the amount of support for Daughter. The Medicare benefits that Daughter received are not included in the entire amount of her support. Turecamo v. Commissioner, 554 F.2d 564 (2d Cir. 1977), affg. 64 T.C. 720 (1975); Rev. Rul. 79-173, 1979-1 C.B. 86. We conclude that the amount of additional expenses for Daughter was $800 in each of 1997 and 1998.

Petitioner paid for Daughter to attend two day care centers, one of which was subsidized. The amounts spent on Daughter's day care centers, including the subsidies, are included in the entire amount of Daughter's support; however, the subsidies are not treated as contributions made by petitioner. Cf. Donner v. Commissioner, 25 T.C. 1043 (1956) (determining that tuition paid by the State for child care was not treated as paid by taxpayer parents); Turecamo v. Commissioner, supra.

We conclude that petitioner provided over one-half of Daughter's support in 1997 and 1998. Accordingly, petitioner is entitled to the dependency exemption deduction for both 1997 and 1998.

The next issue is whether petitioner is entitled to head-of-household filing status. In order to qualify for head-of-household filing status, petitioner must satisfy the requirements of section 2(b). Under section 2(b), an unmarried person may claim head-of-household status if the taxpayer maintains as her home a household which constitutes the principal place of abode of, inter alia, a daughter of the taxpayer for more than one-half of such taxable year. A taxpayer is considered the head of a household if she is not married, not a surviving spouse, and if, among other choices, she maintains as her home a household which constitutes the principal place of abode of an individual, including a daughter of the taxpayer. Sec. 1.2-2(b)(1), (3), Income Tax Regs.

Maintaining a household requires paying more than one-half of the expenses of the household for the taxable year. Sec. 1.2-2(d), Income Tax Regs. Expenses include property taxes, mortgage interest, rent, utility charges, upkeep and repairs, property insurance, and food consumed on the premises, but do not include items such as clothing, education, and medical treatment. Sec. 1.2-2(d), Income Tax. Regs.

We found petitioner and Mr. -------- to be credible and forthright witnesses. Based on all the evidence, we conclude that petitioner paid more than one-half of the expenses for her household. Accordingly, petitioner qualifies for the head-of-household filing status for 1997 and 1998.

The next issue for decision is whether petitioner is entitled to child care credits for 1997 and 1998. Under section 21(a)(1), a taxpayer who maintains a household may receive as a credit a certain percentage of employment-related expenses for a qualifying individual. A qualifying individual includes a child under the age of 13 who is a dependent of the taxpayer under section 152 for the purpose of the section 151(c) dependency exemption deduction. Sec. 21(b)(1)(A).

Employment-related expenses are those incurred to care for a qualifying individual, but only if they are incurred to enable the taxpayer to be gainfully employed. Sec. 21(b)(2)(A)(ii). These expenses include child care services, such as nursery school. Sec. 1.44A-1(c)(3)(i), Income Tax Regs.

As previously indicated, petitioner provided more than one-half of the cost of maintaining the household. Petitioner's child care costs were incurred to care for Daughter, her qualifying child, while petitioner worked. As previously indicated, Daughter qualifies as petitioner's dependent for 1997 and 1998. As a result, petitioner is entitled to the full child care credits for 1997 and 1998.

The final issue for decision is whether petitioner is entitled to earned income credits (EIC) for 1997 and 1998. Under section 32(a), a taxpayer may be allowed an EIC if she is an eligible individual. An eligible individual includes one who has a qualifying child for the taxable year. Sec. 32(c)(1)(A)(i). Under section 32(c)(3)(B) a qualifying child includes a daughter of the taxpayer or a descendant of a daughter. The qualifying child must have the same principal place of abode as the taxpayer for more than one-half of the tax year, under section 32(c)(3)(A)(ii), and the child must not have attained the age of 19, under section 32(c)(3)(C)(i).

Additionally, in order to receive the EIC, the taxpayer must have identified the child on her return under the identification rule of section 32(c)(3)(D), but need not have so identified the child to be an eligible individual with respect to that qualifying child. The identification rule under section 32(c)(3)(D) is effective for both 1997 and 1998.

Under section 32(c)(1)(C), the so-called tie breaker rule, if there are two or more eligible individuals who could receive the EIC with respect to that qualifying child, only the individual with the highest modified adjusted gross income for such taxable years shall be treated as the eligible individual with respect to the qualifying child. Sutherland v. Commissioner, T.C. Memo. 2001-8; Jackson v. Commissioner, T.C. Memo. 1996-54.

Daughter had the same principal place of abode as both petitioner and the Peter and Katherine for more than one-half of 1997 and 1998. Daughter is petitioner's daughter, and she is also a descendant of the Peter and Katherine' daughter. Daughter had not attained 19 by the close of either 1997 or 1998. Daughter could be a qualifying child for either petitioner or the Peter and Katherine, and either petitioner or the Peter and Katherine could be the qualifying individual or individuals. The Peter and Katherine, filing jointly, reported gross income in the amount of $60,485 for 1997 and $69,537 for 1998. The Peter and Katherine' modified adjusted gross income for both 1997 and 1998 was higher than petitioner's. Accordingly, upon the application of the tie breaker rule, the Peter and Katherine are treated as the eligible individuals with respect to Daughter under section 32(c)(1)(C).