(WARNING: This topic is full of potential landmines. Several readers have contacted me with questions and scenarios where the outcome could be different depending on how one interprets certain facts and circumstances. If this topic applies to you, pay a tax advisor to research your situation before making final decisions.)
(Also, see the “edited to add” parts below for additional points to ponder.)
Here’s the scenario and question I pondered in Part 1:
Husband and wife have 4 kids. The wife passes away. Five years later, the husband unexpectedly dies.
Two of the kids are adults in their 20s, but the other 2 kids are teenagers under the age of 18 and still in high school. The oldest 20-something gets custody of the teens.
In the year the father died, who claims the teens: the deceased father on his final tax return, or the eldest adult child who now has custody?
Analysis: Qualifying Child or Qualifying Relative?
Both of the teens are clearly still qualifying children. They’re under age 19 and still in high school. So, we’re going to look at the qualifying child rules to see what tax law can tell us about this situation.
Qualifying Child: Step-by-Step
Rule 1: The child must be the taxpayer’s child, grandchild, brother or sister.
Advantage: Tie. Both the deceased father and the eldest adult child meet this rule. (Edited 9/8/15 to add: be careful when applying this rule; parents usually trump other relatives. AGI could come into play. My analysis is not wrong in this specific scenario where the eldest son lives on his own, but there are multiple ways this rule could get really sticky. If you’re in this situation you would want to really think about the rules here.)
Rule 2: Must live with the taxpayer more than 1/2 of the year.
Advantage: It depends. See further discussion below.
Rule 3: The child is under age 19 at the end of the tax year, or under age 24 if a college student.
Advantage: Tie. The teens are under age 18 and still in high school. They clearly meet this rule and it doesn’t play into our analysis.
Rule 4: The child must not provide more than 1/2 of THEIR OWN support.
Advantage: Tie. Note that the rule states that the child cannot provide more than 1/2 of their own support. For our analysis, it doesn’t matter if the deceased father or the eldest child provided more support. Also, for our analysis, assume that the teens didn’t provide more than 1/2 of their own support.
Rule 5: The child is not married.
Advantage: Tie. The teens are not married.
Analysis: It All Comes Down to the Abode Test
The tiebreaker here is, who did the teens live with for more than 1/2 the year. Which means, it depends on when the father died.
If he died in the first half of the year (before July 1st), then he couldn’t claim the teens on his final return because they didn’t live with him more than half the year.
If he died in the last half of the year, then ONLY he would be entitled to claim the teens, because they would have lived with him more than half the year.
(Edited 9/8/15 to add: an astute reader asks a good question — does dad’s tax year end on the date of his death? If so, the girls would have lived with him for 100% of HIS tax year, thus making him the only one who could claim the girls, even if he died in the first half of the year. I interpret the abode test to mean calendar days of a full calendar year [so 183 days would equal more than half], but I am going to research this some more.)