All In The Family

Introduction. The purpose of our newsletter is to inform readers of what we think are interesting developments in the estate planning and elder law areas. Occasionally, related income tax developments come to our attention which we think some readers might find interesting.

What is a "Family"? A recent decision of the Tax Court in the Leonard case involves an interesting court decision on what constitutes a family for income tax purposes. We are all aware of the dependency deduction. The dependent deduction shows up boldly on the income tax return. However, there are other income tax issues that are directly affected by the financial arrangements involving a group of individuals, related or not, residing in a common residence.
While this may not affect our readers directly, you may be aware of friends or other members of your family who may have similar circumstances.

Danita Leonard Facts. Danita Leonard was an unmarried individual with full time employment. She provided 80% of the household expenses for her roommate, her roommate’s two grandchildren, and herself.

On her federal income tax return for 2005 she claimed:

1) head of household status;
2) adjusted gross income under $30,000;
3) a dependency deduction for her roommate and her roommate’s grandchildren;
4) child care credit;
5) child tax credit;
6) unearned income credit.

(She also claimed an education credit for college courses she took in connection with her employment, an issue not germane to our discussion here.)

The IRS challenged all of the items for which Danita claimed eligibility. It is of great interest that Danita represented herself all the way to the Tax Court, which ruled that Danita was:

1)entitled to head of household status;
2)entitled to claim a dependency exemption for her roommate;
3)entitled to claim dependency exemptions for the grandchildren of the roommate, because each was qualified as a qualifying relative;
4) not entitled to a child tax credit;
5) not eligible for the earned income credit;
6) eligible the education tax credit.

Comments We credit Attorney Marc Soss, a contributor to our estate planning newsletter from Leimburg Services with bringing this case to our attention. The case was entered under Section 7463(b), which means that it cannot be claimed as a precedent in other cases. However, practitioners in family law and estate planning may well use the principles enunciated in this case in advising people about the income tax benefits of various living and expense sharing arrangements.

Brief Review. To qualify for "Head of Household" treatment, a taxpayer must not be married or a surviving spouse at the close the taxable year. Moreover, the taxpayer has to have a dependent living in the home as the dependent’s "principal place of abode". Without getting into specifics and technicalities, the Tax Court found that one or more of the persons living in Danita Leonard’s house, for which she was providing the principal support, qualified as dependents under IRC Section 152. In fact, the Court determined that Leonard’s roommate and the roommates two minor grandchildren were dependents.

Conclusion. The purpose of highlighting the Leonard decision is to point out that there are many living arrangements involving individuals related or unrelated who care for minor children. While many such living arrangements involve taxpayers at or near the poverty level, often individuals with more substantial incomes provide such support. All "these un-conventional families" need to study the possible tax benefits of "head of household" status.

We would also express respect and admiration for the taxpayer, Danita Leonard, who pursued and argued her own case in front of the Court. For the more specific references for readers, friends or advisors, we refer them to Leonard v. Commissioner, TC Summary Opinion, 2008-141.

We hope you find this comment of interest and further hope that it may find applicability among the members of your family, friends or acquaintances.

If you have questions concerning estate planning matters, including elder law or medicaid eligibility, please contact Jim Modrall or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau and David H. Rowe at (231) 941-9660
©BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.