Tax tips: Getting socked by severance pay

Raphael Tulino

Raphael Tulino is the spokesman for the IRS in the Orange County/San Diego area, and he’s volunteered to answer your tax questions …

Q. I received a bulk severance pay this year, but about 60% was deducted in taxes. I need tips on how to retrieve part of it.
A. From IRS Publication 525, Taxable and Non-Taxable Income, Page 4, “Severance pay. You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract.”

From your question, I take it you mean a big chunk of it was withheld (presumably for federal and state tax purposes) and thus what you received was smaller than expected? Should this be so, then keep in mind that when you file your tax return then you may then receive a refund based on your complete set of facts and circumstances (income, income sources, deductions, credits, etc.) that go into your tax return.

In other words, you must file and include the total severance pay as income to get any (tax) withholding refunded to you.

Q. Our grandson and daughter have been living with us for two years while she went to school. We tried to claim him on our taxes last year but his father beat us to it. Our tax man said there was nothing we could do. Well this year we are going to try again, is there any way we can be sure we take the deduction? As we have paid for all his needs and the father paid some child support but not much, what can we do?
A. An answer here is going to rest on your (and the father’s) complete set of facts and circumstances and your daughter’s as well.

First, allow me to copy from a recent column, some very general rules on claiming dependents such as children/grandchildren on your tax return:

“There are two types of dependency exemptions you can take on your tax return — personal exemptions for yourself and your spouse and exemptions for dependents such as your children. While each is worth the same amount, different rules apply in determining eligibility.”

“In order to claim a dependency exemption, three tests must be met:

Dependent taxpayer test
Joint return test, and
Citizen or resident test

From there, you must then satisfy the qualifying child test (relationship, age, residency, support and joint return tests) in order to claim them as a dependent on your tax return.

If he does not meet the tests to be a qualifying child, then he may meet the tests as a qualifying relative. IRS Publication 501, Exemptions, Standard Deduction and Filing Information provides complete examples and details for more clarity. Read through the information on Pages 9–20.”

Publication 501 offers information on special rules for a qualifying child of more than one person (Pages 14-16) and special rules for children of divorced or separated parents (Page 19). There are tie-breaker rules as well. Take a look at all the examples provided (there are several). From there I hope you get more clarity.

If, indeed, you are sure that you qualify to claim him, then you should file on paper (even if the father beats you to it) and claim the exemption. This could delay your refund and it could even result in contact from the IRS to determine who is entitled to the exemption. If you have the records to back up your position, however, then you should claim the tax benefits to which you are entitled.

Finally, the best thing — if at all possible — is to work it out with the father first to avoid all of this.

Q. My 34-year-old son has Stage Three brain cancer which is terminal. He had a brain tumor operation in December of 2009 and has been under our care at home ever since he could leave St. Jude Hospital. We managed to file his taxes for 2009, however, with no income for 2010 and also 2011 due to his still being unable to work, drive or do anything without someone helping him, can we claim him this 2011 tax year?

My CPA informed me we could last year and I did so, however, I cannot find anything in the IRS or state tax books confirming this. He is receiving Social Security in the amount of $876 on a monthly basis.
A. Please, before anything else, accept my thoughts and prayers. I would refer you to the answer above. The subject is covered completely in IRS Publication 501. There are essentially seven or eight tests to meet in order to claim a dependent on your tax return.

Normally in this forum it’s hard to provide anything definitive as an answer as a complete set of facts and circumstances is needed.

But, it does seem as if you can claim him either as a qualifying child or qualifying relative based on the information in Publication 501, but do use it as a guide to be sure.

Table 5 in Publication 501 provides a useful overview of the rules for claiming an exemption as a dependent.

Further, a qualifying child of your son’s age should not be harmed for eligibility by the $876 in Social Security income. Age is waived if totally and permanently disabled. This is defined later in Publication 501 as meeting both of these criteria:

He or she cannot engage in any substantial gainful activity because of a physical or mental condition.
A doctor determines the condition has lasted or can be expected to last continuously for at least a year or can lead to death.

Once again, please review the rules in Publication 501 because your son may meet the definition of a qualifying child if his condition is considered “totally and permanently disabled” and if that doesn’t fit, look at the rules for qualifying relative.

Have you got a tax question? Send it to moneymatters@ocregister.com and put “tax question” in the subject line. Please include your name and phone number. They will not be published.

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