I recently received a question at USTaxAid.com from a person who sadly has a story we’re going to hear a lot, I suspect.
She lost her job, received unemployment and had a small business (Schedule C, Sole Proprietorship) that had a loss. She also lived with her boyfriend and is wondering if it makes sense for him to “claim” her on his taxes.
The Two Questions You Need to Ask About Every Tax Strategy
When it comes to tax questions, there almost always really are two questions. Can I? And, should I?
Let’s start with “Can I?”
How does someone become a tax dependent of someone they’re not related to? To keep the people straight, let’s just call them Jenny and Michael.
Michael has a W-2 job with a good salary. Jenny had much lower income this year. But, because they’re not married or related, the requirements are more particular. It’s easier to claim a dependent that you’re related to, like a child or parent.
Jenny would need to have gross income that less than $4,300 for the year. That would be the total gross pay for her job during the time she had it plus the unemployment payments she received. She has to file if she has a Schedule C, but it may be possible to transfer the business, and business loss, to Michael. She would work in the business.
Additionally, in order to do this, Michael will need to pay over half of Jenny’s living expenses.
So, can he? Maybe. The sticky point is the business. If he had nothing at all to do with it, he wouldn’t be able to use the loss against his other income. You need both basis and to actively participate in a business to take the loss. If Jenny has to report the business, then the loss will stay on her return. It won’t help Michael’s tax return.
But the other bigger question in this case is “Should he?” And the answer is no.
Dependent Exemption Since 2018
Since 1/1/2018 and the Trump Tax Plan, there is no deduction for dependents. If she had a business loss that could be her boyfriend’s that could be a reason, but most likely there is no way that could happen.
Jenny will be giving up her standard deduction and in exchange, her boyfriend gets no benefit.
Could they do this? Possibly. Should they? No.
We’re into year-end tax planning now. How are you doing with yours?