Question about claiming dependents on taxes
January 16, 2016 3:27 PM
After speaking with my stepmom and dad, they and their accountant said that I should be claiming my mom, sister and nieces as dependents. He has been their accountant for a while, but I don't know him and know whether I should trust what he says.
My sister and two young nieces live with my mother, next door to me. My mom is disabled, my sister is unemployed, and they take care of the children. Both, are married, but long separated (years) after getting out of pretty bad situations. None of them, husbands included, are taxpayers, as far as I know.
I pay the power bill, home insurance, car insurance, home phone, and internet bills every month, those are the regular bills, among other assorted things. My mom pays the mortgage (the only thing she can afford) out of her disability benefits.
Upon speaking to my stepmom and dad about this situation, they spoke to their accountant and told me that he said that I should be claiming them as dependents, which I didn't think was possible. After looking at the IRS website, I see that they may qualify as "qualifying relatives" but I wouldn't be able to claim the kids as "qualifying children" as I'm not their parent.
I mentioned this to my insurance agent also in passing, and he told me not to claim my mother as a dependent, since it would change my income and my health insurance subsidies. I'm also wondering if claiming them would change my sister's SNAP benefits if I were to claim her as a dependent.
Can anyone more knowledgeable help me sort through this situation? The more I read the more confused I get. My stepmom and dad's accountant told me to do it, but I've only ever only filed a simple 1040 form, and I am not looking to trigger an audit, although at this point I almost expect it if I were to go this route. The accountant, on the other hand, seem to think that everything should go OK, unless someone else happens to try to claim them as dependents too, and then it is an automatic audit.
Should I just call the IRS and ask them in this situation or find another accountant? I don't want to raise red flags, even though I don't think I'm doing anything wrong.
Thanks all.
My sister and two young nieces live with my mother, next door to me. My mom is disabled, my sister is unemployed, and they take care of the children. Both, are married, but long separated (years) after getting out of pretty bad situations. None of them, husbands included, are taxpayers, as far as I know.
I pay the power bill, home insurance, car insurance, home phone, and internet bills every month, those are the regular bills, among other assorted things. My mom pays the mortgage (the only thing she can afford) out of her disability benefits.
Upon speaking to my stepmom and dad about this situation, they spoke to their accountant and told me that he said that I should be claiming them as dependents, which I didn't think was possible. After looking at the IRS website, I see that they may qualify as "qualifying relatives" but I wouldn't be able to claim the kids as "qualifying children" as I'm not their parent.
I mentioned this to my insurance agent also in passing, and he told me not to claim my mother as a dependent, since it would change my income and my health insurance subsidies. I'm also wondering if claiming them would change my sister's SNAP benefits if I were to claim her as a dependent.
Can anyone more knowledgeable help me sort through this situation? The more I read the more confused I get. My stepmom and dad's accountant told me to do it, but I've only ever only filed a simple 1040 form, and I am not looking to trigger an audit, although at this point I almost expect it if I were to go this route. The accountant, on the other hand, seem to think that everything should go OK, unless someone else happens to try to claim them as dependents too, and then it is an automatic audit.
Should I just call the IRS and ask them in this situation or find another accountant? I don't want to raise red flags, even though I don't think I'm doing anything wrong.
Thanks all.
I would definitely call the IRS and ask them about the situation. I am not an accountant but you can generally claim someone as a dependent if you provide more than 50% of their support. Paying the rent/mortgage, utility bills, and food count as support. The person you are claiming also can't have more than $4,000 per year in income. My mom doesn't work and I provide all of her support so I've been claiming her as a dependent for the past several years now. There hasn't been an issue for me because she does not have any income and there is no other way she would be able to support herself.
posted by Nicole21 at 6:02 PM on January 16, 2016
posted by Nicole21 at 6:02 PM on January 16, 2016
If these folks plan to file their own taxes (and I'm 100% sure they do) they're expecting to get their Head of Household tax credits. It's around $4,000 annually, and folks living close to the edges of poverty are used to getting it.
So if all of these folks are A-OK with giving up their tax credits (good luck with that) you can explore further.
posted by Ruthless Bunny at 6:34 PM on January 16, 2016
So if all of these folks are A-OK with giving up their tax credits (good luck with that) you can explore further.
posted by Ruthless Bunny at 6:34 PM on January 16, 2016
So if all of these folks are A-OK with giving up their tax credits (good luck with that) you can explore further.
I will just mention that if this is the case, the reason for you to claim them as dependents is **because you will save more money on your taxes than they will save on theirs**. This is the **one and only reason to do this**.
The point is, that if you are saving more than they are by claiming them as dependents, simply pay *them* what they would have saved by claiming themselves. That way, they end up exactly as they would have been before and you end up better off. Or, split the difference so that you **both** end up better off.
(True that you had better be sure there are no further ramifications to this than the income tax savings, and also be aware that people are prone to go absolutely ballistic over the idea that they are your "dependent" even though this is an income tax definition of "dependent" that doesn't necessary have anythuing to do with the every day definition of the term.)
posted by flug at 8:41 PM on January 16, 2016
I will just mention that if this is the case, the reason for you to claim them as dependents is **because you will save more money on your taxes than they will save on theirs**. This is the **one and only reason to do this**.
The point is, that if you are saving more than they are by claiming them as dependents, simply pay *them* what they would have saved by claiming themselves. That way, they end up exactly as they would have been before and you end up better off. Or, split the difference so that you **both** end up better off.
(True that you had better be sure there are no further ramifications to this than the income tax savings, and also be aware that people are prone to go absolutely ballistic over the idea that they are your "dependent" even though this is an income tax definition of "dependent" that doesn't necessary have anythuing to do with the every day definition of the term.)
posted by flug at 8:41 PM on January 16, 2016
I am not a tax professional but the advice given in the thread sounds good; I'd call the IRS first as this is not a particularly uncommon situation and they should be able to help you figure out what is possible / financially most beneficial, or to help you determine if you should be talking to an accountant yourself. Do it now, before they get all busy with tax season stuff -- they're very nice and helpful but repeated funding cuts to IRS have meant longer hold times for taxpayers calling in. Because cutting revenue agents = cost savings. Yeah.
However, I am a public health insurance benefits enrollment professional (although IANYPHIBES) and I can speak to that component of your question.
I am not sure your agent is giving you the right advice, or at least it sounds like they're not really explaining to you why they are advising you not to do this -- although they may be privy to more details than you've disclosed in your AskMe. It gets into kind of personal financial issues, actually.
From what you've said, it sounds like you're considering going from having a tax household of 1 (yourself) to a tax household of 3 (yourself, your dad and stepmom), 4 (those plus sister) or 6 (everyone!). There are some big health-insurance-related implications for this, and without further information it's hard for me to tell if there is net benefit from either a financial perspective or from an access-to-affordable-care point of view in your situation.
Your subsidies for insurance premiums are based on where your income stands as a percentage of the Federal Poverty Line, which is based on income (obviously) and household size. For instance, a single person making $2000/mo is not considered to be below the poverty line, but a household of 5 people with the same income would be.
The lower your income is as a percentage of the poverty line, the more generous the subsidies are -- because the government looks at you and says "Yikes, FireballForever only makes X amount of money, and so they can't afford to pay more than Y amount per month for insurance, but a middle-of-the-road plan for them will cost Y+Z per month. So we'll give them Z dollars per month to help them pay for insurance."
Does that make sense? Bottom line: typically, having a bigger tax household is going to result in MORE assistance from the government with your premiums.
However there are two big wrinkles:
1. Per your profile, you are in a state which has not expanded Medicaid, the government program that provides free or very-low-cost, publicly administered insurance for people with a low income. No one anticipated states being able to opt out of Medicaid when the Affordable Care Act was passed, so the ACA did not authorize subsidies for people below a certain percentage of the Federal Poverty Line (about 133%), because the legislation as originally designed provided that people under that threshold would get insurance through Medicaid -- this has been a known issue since the ACA was implemented in 2014 but fixing it requires Congress to pass a legislative patch and the party which controls Congress is ideologically opposed to doing so.
What does that mean for you? If your income as a percentage of the poverty line goes too low with the addition of 2 / 3 / 5 people to your tax household, you could lose ALL your subsidies (again, this is assuming the location listed in your profile). And that may be what your insurance agent is concerned about. However, it may make sense for you to claim one or two of them in order to reduce your income and get higher tax credits for your insurance premiums, again as long as it doesn't put you below the cutoff. I'd need more information about your income as well as the income of the people you would be claiming in order to evaluate that.
2. You are liable under the "individual mandate" provisions of the ACA to ensure that everyone you claim on taxes has health insurance, or else you must pay a substantial fine. So part of deciding whether to claim them should involve finding out if they have insurance, and if not what it would look like to get coverage for them. If you were to find that claiming them will result in loss of all subsidies (as mentioned above), you would have the option of paying full price for insurance for yourself / others in your tax household or of taking an exemption from the fine due to the coverage gap opened up by the irresponsible and utterly reprehensible decision your state government made not to expand Medicaid for people with low incomes.
So there are some unanswered questions that you will need to investigate. I know this is kind of a lot of complicated information to digest, and it well may be that your insurance agent is correct but just didn't do a great job explaining the reasoning behind their advice. If you still have questions / want a second opinion, I'm happy to give you more informal advice through MeMail, or I can help you to find free in-person health insurance advice in your area. You can also play around with the numbers for various scenarios using the estimator at healthcare.gov/see-plans.
posted by tivalasvegas at 4:07 AM on January 17, 2016
However, I am a public health insurance benefits enrollment professional (although IANYPHIBES) and I can speak to that component of your question.
I am not sure your agent is giving you the right advice, or at least it sounds like they're not really explaining to you why they are advising you not to do this -- although they may be privy to more details than you've disclosed in your AskMe. It gets into kind of personal financial issues, actually.
From what you've said, it sounds like you're considering going from having a tax household of 1 (yourself) to a tax household of 3 (yourself, your dad and stepmom), 4 (those plus sister) or 6 (everyone!). There are some big health-insurance-related implications for this, and without further information it's hard for me to tell if there is net benefit from either a financial perspective or from an access-to-affordable-care point of view in your situation.
Your subsidies for insurance premiums are based on where your income stands as a percentage of the Federal Poverty Line, which is based on income (obviously) and household size. For instance, a single person making $2000/mo is not considered to be below the poverty line, but a household of 5 people with the same income would be.
The lower your income is as a percentage of the poverty line, the more generous the subsidies are -- because the government looks at you and says "Yikes, FireballForever only makes X amount of money, and so they can't afford to pay more than Y amount per month for insurance, but a middle-of-the-road plan for them will cost Y+Z per month. So we'll give them Z dollars per month to help them pay for insurance."
Does that make sense? Bottom line: typically, having a bigger tax household is going to result in MORE assistance from the government with your premiums.
However there are two big wrinkles:
1. Per your profile, you are in a state which has not expanded Medicaid, the government program that provides free or very-low-cost, publicly administered insurance for people with a low income. No one anticipated states being able to opt out of Medicaid when the Affordable Care Act was passed, so the ACA did not authorize subsidies for people below a certain percentage of the Federal Poverty Line (about 133%), because the legislation as originally designed provided that people under that threshold would get insurance through Medicaid -- this has been a known issue since the ACA was implemented in 2014 but fixing it requires Congress to pass a legislative patch and the party which controls Congress is ideologically opposed to doing so.
What does that mean for you? If your income as a percentage of the poverty line goes too low with the addition of 2 / 3 / 5 people to your tax household, you could lose ALL your subsidies (again, this is assuming the location listed in your profile). And that may be what your insurance agent is concerned about. However, it may make sense for you to claim one or two of them in order to reduce your income and get higher tax credits for your insurance premiums, again as long as it doesn't put you below the cutoff. I'd need more information about your income as well as the income of the people you would be claiming in order to evaluate that.
2. You are liable under the "individual mandate" provisions of the ACA to ensure that everyone you claim on taxes has health insurance, or else you must pay a substantial fine. So part of deciding whether to claim them should involve finding out if they have insurance, and if not what it would look like to get coverage for them. If you were to find that claiming them will result in loss of all subsidies (as mentioned above), you would have the option of paying full price for insurance for yourself / others in your tax household or of taking an exemption from the fine due to the coverage gap opened up by the irresponsible and utterly reprehensible decision your state government made not to expand Medicaid for people with low incomes.
So there are some unanswered questions that you will need to investigate. I know this is kind of a lot of complicated information to digest, and it well may be that your insurance agent is correct but just didn't do a great job explaining the reasoning behind their advice. If you still have questions / want a second opinion, I'm happy to give you more informal advice through MeMail, or I can help you to find free in-person health insurance advice in your area. You can also play around with the numbers for various scenarios using the estimator at healthcare.gov/see-plans.
posted by tivalasvegas at 4:07 AM on January 17, 2016
This thread is closed to new comments.
But yeah, go ahead and call the IRS yourself: they've got a good rep for helpful answers.
posted by easily confused at 3:55 PM on January 16, 2016