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Thinking through our tax strategy this year

January 23rd, 2013 at 07:48 pm

Ugh, I realized one of the reasons I've been putting off gathering our tax docs this year is that I just don't know who should claim SL on their taxes.

Of course most of you who follow my blog know the whole story, but bear with me while I explain it, just so this entry makes sense. (note to newbies, I have a very "alternative" family, so if that sort of thing tends to bother or offend you, best to skip this post. Smile )

So we have a three-adult relationship. NT and I are legally married and he is a UK citizen, permanent resident of the U.S. through a marriage visa.

AS is an equal partner in the relationship (in fact she and I were together long before NT came into it), but not in legal terms. (Although she is well-protected in terms of estate planning and healthcare directives, there's not much we can do to legally establish our relationship in the eyes of the government.)

NT and I had a child, AA, and NT and AS had a child, SL. (My child has my last name and their child has NT's last name, if anyone's interested.) We were able to do a third-parent adoption, so in Minnesota state, at least, we are all three the legal parents of both kids. (I'm not sure that ruling would have any bearing outside of our state and especially outside our country.)

When it comes to filing taxes, NT and I file jointly, of course, and AS files as a single person. Last year we added AA to the mix, and it was an easy decision to put her on NT and my return, since she is biologically ours, the adoption had not taken effect, and we provide the majority of support.

So now we come to SL. We still provide the majority of support for her as well (having two incomes on our return, and both making more than AS), so should we claim her on our return?

I believe the answer is yes; if I recall from my tax course many years ago, the household that provides more than 50% of support claims the child.

But at the back of my mind I'm thinking about the eventual immigration process to the UK, and what would be best for that. If we move, it will be because AS has found a way to establish residency on her own, probably through employment or starting her own business.

NT and I would then apply for entry as a UK citizen and his spouse. Again, it's a no-brainer that AA would be part of our application. But what about little SL?

In providing records for immigration, the birth certificates are going to be produced, no doubt. Which will raise fewer red flags; AS applying with her child who has a British citizen's name on the birth certificate although he's not her spouse? Or NT and I applying with a child whose mother isn't legally related to us?

And, since tax documents may also be a key part of the application (proving me and NT were a legitimate married couple), where should SL be on our tax docs? Are we even allowed to include her on AS's return if that seems like the smartest move for immigration, since she only provides 1/4 to 1/3 of the financial support?

It concerns me a lot. We're not attempting to circumvent any rules, and haven't broken any laws. SL would be legally entitled to move to UK with either NT or AS, since she is biological child to both of them. She also is going to have essentially dual citizenship once we get her a British passport. But I feel like our situation is going to come to light in the immigration process and will raise the risk of some kind of red flag/ban on one of us moving between countries.

When NT came over here, we didn't have children so AS's name never even had to enter the picture. We basically avoided talking about our situation. I just don't think we'll be able to do that this time around, and I'm not sure how best to handle it.

I'm still leaning toward putting SL on my and NT's tax form. She has his last name, she's his biological child, and we provide the most support. Maybe on immigrating a simple consent form from AS allowing NT to bring SL to England, without further comment about her own plans, would suffice? Maybe I'm making too much of this and it wouldn't be a problem. People have affairs and children out of wedlock all the time, so in legal terms that's what I should be looking at, I suppose. That's the closest model to what we have, even though it's NOTHING like what we have.

I may ask my tax attorney for his input, but he'll only be able to advise on the tax side, not in terms of possible future immigration.

Ack.

9 Responses to “Thinking through our tax strategy this year”

  1. ThriftoRama Says:
    1358971061

    I would consult a profession. My first gut impression though, is that SL should be on As's tax return. It seems simpler in the long run, and with immigration?

  2. MonkeyMama Says:
    1358972257

    I wouldn't worry too much about the tax versus legal/immigration. The two don't really have much to do with each other. For the kids, they should both get dual citizenship by virtue of their father. Right? (That said, I am certainly no legal expert!!). He is the father no matter who claims the dependent.

    As for the tax side of things, it is a unique situation, but I don't think it really matters who claims the dependency. I'd do whatever saved the most taxes. Unless there is some compelling legal reason to have her on your tax return.

    The dependency rules have changed in recent years and I am looking at my giant flowchart as a refresher. (If you google "dependency flowchart" I think the IRS has one on their site somewhere). My first reply was off the top of my head. But I am looking and there is a tie-breaker rule for parents (generally meant for non-married parents). The parent with the higher AGI is the one who technically can claim the child. I think since you are all in agreement, and both parents clearly qualify, it doesn't really matter. This is more to clear up disagreements in this area. There is a form where the higher AGI can release the dependency claim to the other parent BUT it is designed for children who live in another home from the parent taking the depdendency exemption. So, I don't think this really applies in your case.

    {The support test is for non-minors basically, the point is that the dependent is not providing their own support. Whoever provides more support does not come into play, but could be some of the logic with the "higher AGI tie breaker."}.

  3. MonkeyMama Says:
    1358974275

    Not a flowchart, but it makes sense:

    Text is http://www.irs.gov/uac/A-%E2%80%9CQualifying-Child%E2%80%9D and Link is
    http://www.irs.gov/uac/A-%E2%80%9CQualifying-Child%E2%80%9D

  4. snafu Says:
    1358974840

    I too believe you will benefit from a consultation with a lawyer who's specialty is UK Immigration. I believe you could emigrate to the UK based on your marriage to UK citizen NT along with daughter AA who will likely hold UK citizenship by travel date.

    I'm of the opinion that NT, AS & SL could travel as a family group who may not have marital status but certainly have de facto status or common law status over the years.

    Isn't the income tax deduction decision applied where it is most helpful/cost effective to the taxpayer?

  5. Bob B. Says:
    1358977467

    Thanks for the explanation on your family situation. I've read your side bar, and have wondered what it was about. I have no substantive advice on taxes/immigration.

  6. ceejay74 Says:
    1358978685

    Thanks guys. I just shot an email to our lawyer who handled adoption/estate planning, asking if he can recommend an attorney for a consultation.

    Looking at evidence requirements for immigration, it does appear that tax documents as well as bank records will probably be necessary. We all have a joint checking account, so that's a bit of a concern as well.

    Hopefully a qualified lawyer will be able to tell me that I'm overthinking!

  7. North Georgia Gal Says:
    1358979253

    I think it is a good thing to consult a lawyer to make sure you are doing what makes the most sense.

  8. LuckyRobin Says:
    1358985770

    Although my gut instinct would be to have her father claim her, I would definitely see which one would lower your taxes the most.

  9. PNW mom Says:
    1358994787

    It certainly doesn't hurt to be prepared. Hopefully that way, there will be no ugly surprises down the line. Good luck!

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