Filing Taxes When a Loved One is in Prison

If your spouse or child is serving a prison sentence, you may be a little confused about how to complete your tax return this year. You aren’t alone. According to a Bureau of Justice Statistics report, the number of prisoners held by state and federal correctional authorities on December 31, 2014 was 1,561,500.

It’s important to know that your loved one may be responsible for filing a tax return. However, their situation has some unique tax rules. Here’s what you should know.

If your spouse is incarcerated:

The inmate’s income earned while incarcerated does not qualify as earned income for the Child Tax Credit (CTC) or the Earned Income Tax Credit (EITC).

If the inmate performs services for any payor, even a private company, while in jail, the wages received are not earned income for the CTC or EITC. Additionally, the status of where the inmate performs the work is irrelevant for the above rule. Ineligible income also includes amounts paid for work performed while in a work release program or while living in a halfway house.

Credits in lieu of cash payments received by inmates are taxable income.

An incarcerated taxpayer must include payments received for services rendered even though they may not receive a Form 1099-MISC. Prisons often pay inmates for services by giving them a credit to be used in the prison commissary. These payments are taxable barter income to the prisoner, even if not considered “earned income” for purposes of the credits from the last bullet point.

Inmates are exempt from the ACA requirements to maintain minimum health insurance coverage.

Any month that includes one day the inmate was incarcerated is exempted from the requirements under ACA that all individuals maintain at least minimum coverage for that month. If an individual wants to request this exemption for 2015 after the end of 2015, he or she will need to claim it on his or her federal income tax return. If claiming the exemption on the tax return, Form 8965, Health Coverage Exemptions, Part III should be completed using code F. For more information, see the Form 8965 Instructions.

If your dependent is incarcerated:

If your child meets the requirements you can claim him or her as a qualifying child for the dependency exemption.

A child of the taxpayer must meet the relationship, age, residency, support and joint return tests to be claimed as a dependent. This means that a qualifying child for dependency purposes must reside with you for more than half of the year. Temporary absences for special circumstances are permitted, including the incarceration of the child at a juvenile facility. The facts and circumstances of the child’s incarceration should be ascertained to determine if the absence is indeed “temporary,” for example, if they are absent for less than one year and you keep up the home in anticipation of their return. A qualifying child must be your son, daughter, stepson, stepdaughter, eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any such individual.

If you meet the support test, you may be able to claim your child or close relative as a qualifying relative for the dependency exemption.  

With one exception, a child or other close relative of the taxpayer does not have to meet a residency test to be treated as a qualifying relative (QR) for the dependency exemption and other dependent-related tax benefits. To be treated as a qualifying relative, with respect to the dependent’s incarceration, the crucial test is the support test.  For this test, the taxpayer must provide more than half of the dependent’s support. Because the state provides most of the support for an incarcerated individual during confinement, it is unlikely that the taxpayer could meet the support test. A taxpayer may not claim a dependent under the qualifying relative rules if the taxpayer provides less than half of the dependent’s support.

You may qualify to take the child tax credit (CTC) on your incarcerated qualifying child if you can meet the temporary absence requirement.

A qualifying child must meet the age, relationship, residency, support, citizenship and dependency test to be a qualifying child for the child tax credit.

For your tax return:

There is no deduction for “charitable” contributions to the inmate.

Donations that are earmarked to benefit a single person cannot be deducted. Only contributions to qualified charitable organizations may be deducted. Therefore, if a fundraiser is held for the benefit of a specific recipient, those donations cannot be deducted. This is true even if the donations are intended to assist a wrongly convicted inmate pay for their appeals.

With an issue as complex as this, you may want to speak with one of our tax professionals for more advice on your specific situation to avoid any potential tax evasion issues.