How Social Security and the IRS define "dependent" differently
When I was a child, my grandfather taught me to play checkers. He liked the game and was quite good at it. For variety, he also taught me a variation called “Giveaway checkers.” The game uses the exact same board, the exact same game pieces and totally different rules. The object of the game is to be the first person to compel your opponent to jump your checkers and remove them from the board. Each player MUST take the move that captures her/his opponent’s checker if such a move is available. The game ends when one of the two players is unable to make a move, usually because she/he has no checkers left on the board. It’s also known as “anti-checkers.”
During tax season, I get frequent questions the answer to which hinges on the difference between Social Security Administration rules and Internal Revenue Service rules. The two agencies use the same data: individual income, household income and how much support is provided and received, but they frequently interpret the data differently and come up with very different conclusions.
For example, one client is 66, but still working part time. He called me up to ask why his tax prep software was showing a portion of his Social Security income as taxable. “I thought that working while collecting would not affect my Social Security benefits after I reach full retirement age,” he complained. I explained to him that he is correct with regard to the Social Security Administration’s rules and calculations. If he was younger than his full retirement age, Social Security would reduce his benefit amount by $1 for every $2 he earned over $18,240 (2020 threshold). But once he has reached his FRA, which he now has, he can earn as much as he wants and his benefit will not be reduced. The IRS, however, does not take into account a taxpayer’s age when determining whether her/his benefits are taxable. The IRS merely looks at the taxpaying unit’s income, considering 100% of all other taxable income plus 50% of Social Security benefits. If the sun of those two components is more than $25,000 and you file “single,” you may have to pay income tax on up to 50% of your Social Security. If your income from those two components is more than $34,000, you may have to pay tax on 85% of Social Security. The respective numbers for a couple filing “married, jointly” are $32,000 and $44,000. Your or your spouses age at the date of filing has nothing to do with it.
Many of my clients are the parents of adults with intellectual and developmental disabilities. Around tax time, I get questions about whether claiming an adult child as a tax dependent can endanger her/his eligibility Supplemental Security Income (SSI) or Medicaid or, conversely, whether the fact that an adult child receives SSI or Social Security Disability Insurance (SSDI) precludes that person from being claimed as a tax dependent. The confusion here arises because in order to claim someone as a tax dependent, you have to provide a certain amount of support to the household and to that person specifically. But providing too much support to a person with a disability could jeopardize that person’s means-tested benefits such as SSI and Medicaid. But it pays to unpack how the two different agencies calculate support.
Let’s look at the example of Leslie and Lou, a married couple who file their income taxes jointly. Their daughter, Lauren, lives with them all year. Lauren is 25 and has an intellectual and developmental disability. Lauren works part time and earns around $400/month. She receives $500 of SSI. The maximum SSI benefit for 2020 is $783/month. If a person with a disability who receives SSI lives in her parents home but does not contribute anything, her parents are considered to be supporting or subsidizing her and she is considered to be receiving what Social Security calls “In-kind Support and Maintenance” or “ISM.” People who receive ISM are eligible for a maximum SSI benefit of only $522. Lauren, however, does pay her parents $500/month in room and board. However, she does earn around $400/month from her part-time job, so her SSI is reduced from the $783 to $500 due to her earned income. Lauren’s parents have calculated that the actual cost of supporting her is $15,000/year.
From the IRS standpoint, Lauren passes the test to be a qualifying child dependent. She is the biological and legal daughter of her parents and she lived with them the entire year. She is exempted from the age/student status aspect of the test because she receives SSI for disability and so is considered “permanently and totally disabled.” And she does not provide more than one half of her own support. As per the IRS support calculation the footnotes here explain that SSI, as public aid, does not count as self-support. Lauren’s work earnings total only $4,800/year against a total cost of $15,000, so she is paying less than one-half her own support. Lauren can be claimed as a dependent for income tax purposes. Note that if Lauren was receiving Social Security Disability Insurance (SSDI) on her own work record, rather than SSI, the SSDI would be considered self-support and could determine whether she remains a “qualifying child.” The fact that Lauren’s parents claim her as a tax dependent does not affect her eligibility for SSI.
What about Medicaid? I have had several clients tell me that they have heard their adult child will lose her/his Medicaid if the parents claim that adult child on their taxes. The confusion here stems from the fact that in some states that expanded Medicaid under the Affordable Care Act (ACA or “Obamacare), such as my home state of Illinois, adults with disabilities can be eligible for Medicaid under two categories. The first is as a person with a disability. This is called “Assistance to the Aged, Blind and Disabled” or “AABD” and eligibility is tied to a person’s eligibility for SSI based on Disability. The second is as a low-income adult under the ACA and eligibility is tied to the Modified Adjusted Gross Income (MAGI) of a person’s tax household. In this case, if an adult child is claimed by parents, the MAGI considered is that of all three combined. However, Medicaid eligibility for those with AABD status has “MAGI-excepted” income limits, which considers only the income of the Medicaid recipient (and her/his spouse, if married).
Lauren applied for Medicaid when she was just 18, shortly after being approved for SSI. At that time, Illinois had not yet expanded Medicaid, so she was determined to be Medicaid eligible under AABD criteria. Lauren has monthly income of $900, which is less than the 2020 AABD Medicaid threshold of $1,063, so she retains her Medicaid regardless of whether her parent’s claim her or not. Note that AABD Medicaid, like SSI, also has a limit on countable resources. Lauren may not have more than $2,000 in her own name, unless it is held in an ABLE account. The fact that Lauren is considered independent of her tax household is only one benefit to her AABD Medicaid status. There are additional benefits. If Lauren works more hours and her per hour wage rises, she may begin to earn so much that she is no longer eligible for SSI. If Lou or Leslie starts to draw a Social Security retirement benefit, Lauren will be eligible for a co-called “Childhood Disability Benefit” or “CDB”, which might push her over the income limit for SSI. In either case, Lauren would be in protected classes and able to retain her Medicaid eligibility based on her former status as an SSI recipient.