Memorandum-to-the-File

Date: September 18, 2015

From: Amanda Biernacki
Subject: Tom 2016 Tax Return Deductions

Facts
Tom and Ashley filed a petition for divorce in Florida in 2014, and a final judgement of
dissolution of marriage was entered by the Florida court in March, 2015, which was signed by
neither Tom nor Ashley. Ashley was named the custodial parent and was awarded the right to
claim Emily starting in 2015, and Tom, currently residing in Texas with his live-in girlfriend
Hilary, was given the right to claim Drew starting in 2015.

Issues
There are two issues concerning Toms 2016 tax return deductions: firstly, whether or not Tom
can claim Hillary as a dependent, and secondly, can he claim Drew as a dependent and
qualifying child for earned income credit and child tax credit?

Applicable Law
Section 151 (a), (c) states that a taxpayer may deduct the exemption amount for each dependent
the taxpayer has for the taxable year. Section 152 (a) defines dependent as a qualifying child, or
a qualifying relative.

Section 152 (d) (1) (A) states that in order to be considered a qualifying relative, an individual
must bear a relationship to the taxpayer. As described in Section 152 (d) (2) (H), an individual
bears a relationship to the taxpayer if the individual lived with the taxpayer for the taxable year
of the taxpayer. According to Section (d) (1) (B), a qualifying relatives gross income for the
calendar year in which the tax year begins must be less than the deductible amount, which is
defined as $2,000 in Section 151 (d) (1). If the individuals gross income exceeds the deductible
amount, Section 151 (d) (3) (A), (B) explains that the exemption will be reduced by the
applicable percentage, or 2 percentage points for each $2,500, which is not to exceed 100
percent. Additionally, Section 152 (d) (1) (C), (D) states that the taxpayer must provide over one-
half of the individuals total support during the calendar year, and the individual must not be the
qualifying child of any other taxpayer during the calendar year.

Section 152 (c) (1) (B) identifies that a qualifying child must bear a relationship to the taxpayer.
Under Section 152 (c) (2) (A), this includes if the individual is a child of the taxpayer. In
addition, Section 152 (c) (1) (B) explains that the qualifying child must have lived with the
taxpayer for more than half of the taxable year. Section 152 (e) (1) (B) provides that there are
exceptions for divorced parents that will allow a child to be the qualifying child of the
noncustodial parent. The noncustodial parent may claim the qualifying child if the custodial
parent signs a written declaration releasing claim to the exemption and the noncustodial parent
attaches the written declaration to their own tax return, as stated in Section 152 (e) (2). Section
152 (c) (1) (C) states that the qualifying child must meet the age requirements, which is said to
include children under age 19 in Section 152 (c) (3) (A) (i). As stated in Section 152 (c) (1) (D),
the individual must provide less than half of their own support for the calendar year.

Section 32 (c) (1) (A) (i) states that any individual who has a qualifying child for the taxable year
is an eligible individual for Earned Income Tax Credit.

Section 24 (a) states that a child tax credit will be allowed for each qualifying child of the
taxpayer. Section 24 (c) (1) defines qualifying child interns of the child tax credit as a qualifying
child who is under the age of 17.

Analysis
Issue 1: In order for Tom to claim Hillary as a dependent, Hillary must fulfill the requirements of
a qualifying relative. Tom and Hillary have been living together since Toms divorce in March of
2015. Hillary will bear relationship to Tom if she continues to live with him until April 15, 2016.
Tom must also provide at least half of Hillarys support for the year, and Hillary cannot be the
qualifying child of any other taxpayer. If these requirements for a qualifying relative are fulfilled,
Tom can claim Hillary as a dependent. In order for Tom to receive the full $2,000 deduction for
Hillary, she cannot make more than $2,000 for the year. The deduction will decrease by 2
percentage points for each $2,500 Hillary makes over $2,000.

Issue 2: For Tom to claim Drew as a dependent and qualifying child for earned income credit and
child tax credit purposes, Drew must fulfill the requirements of a qualifying child. Since Drew is
Toms child, he fulfills the relationship requirement. Drew fulfills the age requirements for a
qualifying child because he is under the age of 19. Drew also does not provide more than half of
his own support. Drew does not live with Tom, and Tom is not his custodial parent. Therefore,
Drew does not fulfill the requirements of a qualifying child. However, if Ashley, the custodial
parent, signs a written declaration releasing claim to the deduction for Drew, Tom may attach this
to his tax return, thus fulfilling the necessary requirements for Drew to be Toms qualifying
child. As a qualifying child of Tom, Drew could be claimed as a dependent. Drew would also
qualify for the purposes of earned income tax credit. Drew would also qualify for the child tax
credit as long he he remains under 17 years of age.

Conclusion
If Hillary continues to live with Tom, Tom provides more than half of her support, and she is not
the qualifying child of any other taxpayer, Tom can claim Hillary as a dependent and deduct
$2,000 minus 2 percentage points for each $2,500 she makes over $2,000. If any of these
requirements are not fulfilled, Tom cannot claim Hillary as a dependent.
Drew would meet the requirements for a qualifying child for earned income credit and child tax
credit if Ashley signs a written declaration releasing claim to the deduction for Tom to attach to
his tax return. As a qualifying child, Drew would also meet the qualifications for a dependent. If
Ashley does not provide the signed declaration, Drew cannot be claimed as a dependent or a
qualifying child.
In case of a dispute, a petition should be filed in the United States Tax Court. This court
specializes in tax cases and does not require tax deficiency payments before the trial. Unlike in
the Small Cases Division of the Tax Court, you will be able to appeal the courts decision to the
U.S. Court of Appeals if needed.