Supporting Unrelated Persons: Any Tax Breaks?

JK Lasser writes: Family units today may be unconventional, with extended families, multigenerations, and other persons living together to save expenses and support each other. From a tax perspective, do the same tax breaks for family members apply to unrelated persons?

Recently, the question came up in a Tax Court case (John Edge, TC Summary Opinion 2013-68) involving a hardworking individual who supported his fiancé, her two children (who were not his biological children), and his fiancé’s mother. The answer is that some breaks may apply while others do not.

 Dependency exemption

A dependency exemption for an unrelated person may be claimed if all of the following conditions are met:

• The taxpayer provides more than half of the unrelated person’s support.
• The unrelated person’s gross income does not exceed the dependency exemption amount ($3,900 for 2013).
• The unrelated person resides with the taxpayer for the entire year (not counting temporary absences).

In the case, his future mother-in-law was his dependent because he satisfied all of the tests. She lived with him for the full year, other than for a vacation at Christmas. However, his fiancé’s children were not his dependents because they are qualifying children of their parents (not their mother’s fiancé).

Tax credits

The earned income tax credit and the child tax credit can be claimed by a taxpayer for a qualifying child. There is a relationship test for being a qualifying child, something that an unrelated person cannot met. Thus, these tax credits cannot be claimed by a parent’s fiancé with respect to the fiancé’s children.

The credits can apply if the taxpayer adopts the children, which is something that sometimes happens after marriage to the children’s parent. However, the costs of adopting a spouse’s children do not qualify for the adoption credit.

Head of household

Head of household filing status entitles the taxpayer to more favorable tax rates and a larger standard deduction than allowed for other single individuals. While this issue was not raised in the case noted above, the status may apply when a taxpayer supports an unrelated person. To claim head of household status, all of the following conditions must be met:

• The taxpayer is unmarried at the end of the year.
• The taxpayer pays more than half the cost of maintaining a home for a qualifying person (dependent). If the qualifying person is the taxpayer’s parent, the parent need not live with the taxpayer (the parent may, for example, live in an assisted living facility); all other qualifying persons must live in the taxpayer’s home for over half the year.

 Conclusion

The personal issues involved when unrelated people live together can be huge. Tax issues can make the situation even more complex. Talk with a tax advisor to resolve the tax issues for your particular case.