Pay Dirt

We’re Afraid We’ve Spent Years Committing Tax Fraud

Will this be a red flag to the IRS?

1040 tax forms with a pen.
Photo illustration by Slate. Photo by Getty Images Plus and Spoon Graphics.

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Dear Pay Dirt,

My husband and I take care of my 35-year-old daughter. She gets monthly disability payments. We claim her yearly on our taxes as a dependent. But I’m afraid we might’ve been doing something wrong.

She does not file yearly taxes. Are we legally obligated to list her income on our taxes? We never have. If we all of a sudden start claiming her income, will this be a red flag to the IRS, and will we possibly get audited?

—Afraid of the IRS

Dear Afraid of the IRS,

Auditing the parents of disabled children isn’t an IRS enforcement focus because it usually doesn’t result in much revenue. But it’s good to understand your daughter’s tax situation, even if knocks from IRS auditors shouldn’t be plaguing your nightmares.

Disability payments come in different flavors, and they have different taxability. Payments from a disability insurance plan your daughter paid for while working are not reportable income. SSDI payments received from working before becoming disabled are only taxable if her income is $25,000 or more per year. If she has been disabled since childhood or didn’t work long before becoming disabled, and qualifies for SSI, those benefits are not taxed.

You also didn’t specify when your daughter became disabled and if this disability is permanent. You can only claim an adult child as a dependent under certain conditions. These conditions are:

—They are permanently disabled (or are under a certain age)
—Provide less than one-half of their own financial support (including disability income)
—Live with you for at least six months out of the year

Even if your daughter’s disability payments aren’t taxable, it can often be to your advantage to file anyway. Filing (even prior tax years) might come with benefits, like the expanded EITC or stimulus payments. You may be able to put this extra money in an ABLE savings account for your daughter. Reach out to your local tax-aide volunteer group for free tax filing help.

I hate to complicate the matter further but don’t forget state taxes, too. Thirteen states tax some or all disability benefits. Contact your state tax agency to understand the rules in your state.

—Lillian

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