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Q&A: Would IRS Challenge a Partial Tax Write-Off for a Live-in Girlfriend?

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May 18th 2015
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Question: It's a constant struggle to meet my alimony payments and support my girlfriend at the same time. And after the IRS takes its cut, I'm really strapped for funds. One way to at least ease the tax bite is for me to hire my girlfriend as a secretary, because she's also good behind a desk. But I'm concerned that by-the-book bureaucrats at the IRS will challenge my tax write-off for her salary. Am I asking for trouble?

Answer: You should sleep undisturbed by thoughts of an audit, provided your girlfriend actually works as a secretary and her salary isn’t higher than the going rate for other secretaries who render services only at the office. But expect the IRS to closely scrutinize the arrangement and perhaps try to scuttle your deduction.

However, the Tax Court might be a tad more sympathetic, as Douglas Bruce discovered. Douglas, a Los Angeles district attorney, paid Elissa Elliott, his girlfriend, $9,000 to cover her living expenses and those of her son and dog. In return, she agreed to run his household and assume major responsibility for the management of his extensive rental properties, chores that included finding furniture and overseeing repairs. Douglas deducted the entire $9,000 as compensation to Elissa for property management. The IRS disallowed all of it, asserting that her services were personal and that he was unable to establish any measurable business expense.

But an understanding Tax Court allowed a reduced write-off. It was indisputable that he had to have a property manager; clearly, she acted as one. Still, noted the court, “it would be naive at best to conclude that every penny of the support” that he furnished was “solely for purposes related to his investment properties.” By the court’s reckoning, “the significant number of properties which were actually rented or were held out for rental during the period” justified a deduction of $2,500 for the compensation paid by Douglas to Elissa for managing his real estate.

Q: During 2015, we will pay our housekeeper a salary and also provide her board and lodging. Aside from what we pay her, she has no other income. Are we able to take her as a dependent?

A: You fail to satisfy the main requirements to claim someone who isn’t your relative by blood or marriage: that you furnish more than half her total support and she’s a member of your household for the entire year in question. What you provide is payment for her work, not support.

Q: What about exemptions for relatives who are aliens?

A: You can claim aliens (persons who aren’t US citizens) only if they’re residents of the United States, Canada, or Mexico. It makes no difference that you pass the support test.

For instance, Malgozata Camilo of New York was unable to claim her parents and brother, all three of whom were Polish citizens visiting in the United States on six-month visas. The Tax Court agreed with the IRS that the visit was insufficient to establish that the trio had become US residents.

About the author:
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator) and an attorney. More on this topic is available from “Julian Block’s Year Round Tax Strategies,” available at julianblocktaxexpert.com.

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