Claiming Dependents

Today's tax question comes from T. Conant in Montana. She asks:

"My boyfriend and I have been living together for about 7 months. My seven year old son and my sister also live with us. So can he claim them on his taxes? And can I write off life insurance premiums I paid last year?"

Unfortunately, your boyfriend cannot claim your son or your sister as dependents on his tax return. And life insurance is not a tax-deductible expense (but this may actually be a good thing, as I'll explain below).

Dependents

Here's the shortest possible explanation about the dependents. Dependents can be either a qualifying child or a qualifying relative. The qualifying child definition always wins out over the qualifying relative definition. Your son and sister would be qualifying children with respect to you, but would be qualifying relatives with respect to your boyfriend. So, he cannot claim them as dependents since you might be able to claim them.

Confusing? You bet, and that's just the beginning. Last year I spoke to Kathy Burlison, Director of Tax Implementation at H&R Block headquarters. Here's what she had to say about complications with the so-called uniform definition of a child: "Unmarried couples who are supporting a child who isn't their 'qualifying child' under the new rules could lose out. If the dependent is someone else's qualifying child, then neither partner could claim the child under the 'qualifying relative' rules." In fact, she even came up with a snappy tax law slogan, "Once a qualifying child, always a qualifying child, and never a qualifying relative."

I suggest that you carefully review the criteria for claiming dependents. If your son lived with you for more than half the year and did not provide more than half of his own financial support, you should claim him as a dependent on your tax return. Your sister might be either a qualifying child or a qualifying relative. If your sister is age 18 or younger, or if she's age 23 or younger and a full-time student, then she would be a qualifying child. Otherwise, she would be a qualifying relative.

Think this is insane? So does National Taxpayer Advocate Nina Olson. In her annual report to Congress, Ms. Olson urged Congress to revise the uniform definition of a child. One change that Ms. Olson supports is allowing taxpayers to claim qualifying relatives as dependents only if they are not claimed as qualifying children by another taxpayer. This would have a positive impact on taxpayers like your boyfriend.

This was Ms. Olson's third legislative recommendation (beginning on page 463 of her report, or page 41 of volume two in this PDF file). The Advocate even highlighted your family situation as an example of an unintended consequence of the new law. (See example 3 on page 464.) You should send a letter to your Congressional representatives if you would like to see the Advocate's recommendations adopted.

Life Insurance

To answer your second question, life insurance is not a tax deductible expense for individuals. But this is actually a good thing, because life insurance proceeds are usually tax-free income to the beneficiary. Here's how the IRS explains it:

"Generally, if you receive the proceeds under a life insurance contract because of the death of the insured person the benefits are not taxable income and do not have to be reported. Any interest you receive would be taxable and would need to be reported just like any other interest received." (Frequently Asked Questions about Life Insurance Proceeds)

More information:

• Dependents and Qualifying Children
• Qualifying Relatives
• Relationship Test and Residency Requirements for Qualifying Relatives
• Complications with the Uniform Definition of a Child
• Life Insurance Proceeds (from Publication 525)

Do you have a tax question? Visit the Ask a Tax Question page. Disagree with my answers? Post your comments in the Tax Forum.

Technorati tags: children, dependents, tax, life insurance, tax question.