Whether you are locked up in jail awaiting trial or serving a lengthy sentence in prison, there is no question that incarceration is a miserable experience. However, the fact that you are in jail or prison does not relieve you of legal responsibilities to file tax returns or pay any tax obligations owed. Inmates and their loved ones should be aware of the special tax rules that apply to them.
Inmates serving time in state prison often have jobs that pay a very nominal amount of money, often a few cents per hour. Many institutions "pay" the inmate by putting credit into their commissary account. The prison will often not issue a 1099-MISC or W-2 form to the inmate, but these payments are still considered taxable income to the inmate that may be subject to taxation. However, most inmates will not be required to file a tax return unless their total income exceeds $12,000.00 (or $24,000.00 for married filing jointly). If taxable income does not exceed the standard deduction, then there is no reason to file.
Some inmates, however, are lucky enough to have income generated outside of the prison walls such as dividend payments, interest, annuities or retirement account payments. This may easily push the income threshold over the limit and the prisoner will have to file a federal tax return. In this case, there are special rules that apply to the inmate:
- Earned Income Tax Credit (EITC): To qualify for the EITC, the taxpayer must have "earned income" during the tax year. However, 26 U.S.C. §32(c)(2)(B)(iv) states "no amount received for services provided by an individual while the individual is an inmate at a penal institution shall be taken into account" for the purposes of earned income. Unless the inmate had earned income from employment either before or after the incarceration within the same tax year, the inmate will be ineligible to take the EITC.
- Child Tax Credit (CTC): To qualify for the refundable portion of the CTC, the taxpayer must have at least $2500.00 of "earned income" during the tax year. The definition of "earned income" has the same definition for the CTC as it does for the EITC. Unless the inmate had earned income from employment either before or after the incarceration within the same tax year, the inmate will be ineligible to take the refundable portion of the CTC.
- Affordable Care Act Minimum Coverage (ACA): Under the ACA, an applicable individual shall maintain minimum essential coverage for every month of the tax year. 26 U.S.C. 5000A(a). However, an "applicable individual" "shall not include an individual for any month if for the month the individual is incarcerated, other than incarceration pending the disposition of charges." 26 U.S.C. 5000A(d)(4). This means that the inmate must already be sentenced by the court. Otherwise, the inmate may be responsible for the individual shared responsibility provision of the ACA. This provision, however, does not apply to tax years 2019 or later according to the Tax Cuts and Jobs Act of 2017.
For a spouse, parent or any other individual looking to claim a tax benefit related to the incarcerated person, he or she should be aware of the following:
- Spouse: The fact that a spouse is incarcerated doesn't prohibit both spouses from filing a joint return together. A spouse filing jointly can file the tax return on behalf of both spouses, even if the other one is incarcerated. However, if the community spouse elects to file married but separately, then the incarcerated spouse will have to figure out how to file his or her own return (if required).
- Dependency Exception: You may be able to claim the incarcerated individual as a "qualifying child" or a "qualifying relative" (a requirement for claiming the earned income credit and the child tax credit for the inmate).
- 1. A person is a "qualifying child" if that person meets all of the following:
- The child was the taxpayer's child or other descendant, or the child was the taxpayer's sibling, stepsibling or a descendant of the sibling or stepsibling. 26 U.S.C. §152(c)(2).
- The child is under 19 years of age (under 24 years of age if a student and at any age if the child is totally and permanently disabled). 26 U.S.C. §152(c)(3).
- The child lived with the taxpayer for more than half of the year. 26 U.S.C. §152(c)(1)(B).
- The child has not provided more than half of his or her own support during the tax year. 26 U.S.C. §152(c)(1)(D).
- 2. A person is a "qualifying relative" if that person meets all of the following:
- That person is not your "qualifying child". 26 U.S.C. §152(d)(1)(D).
- That person EITHER lived with you all year as a member of your household OR be related you as your child, stepchild or foster child (or a descendant of any of them), sibling, half-sibling, step-sibling, any direct ancestor, stepparent, niece or nephew or in-laws. (Despite the name "qualifying relative", a member of your household all year DOES NOT have to be related to you if they lived in your house all year). 26 U.S.C. §152(d)(1)(A).
- That person's gross income for the year is less than $4,050.00. 26 U.S.C. §152(d)(1)(B).
- You provided more than half of a person's total support during the calendar year. 26 U.S.C. §152(d)(1)(C).
- 3. Despite the requirement that a "qualifying child" requires living with the taxpayer half of the year and a "qualifying relative" requires living with the taxpayer all year, there may still be a legal claim because the dependent is on a "temporary absence" from home. In Rowe v Commissioner, 128 T.C. 13 (2007), the U.S. Tax Court found that a petitioner's temporary absence due to jail confinement after arrest but before conviction does not make her ineligible as a qualifying person because it was reasonable to assume petitioner would return to her home with her family. However, this may not be applicable if the incarcerated person will be spending more than one year in jail or prison.
- 4. The taxpayer must also provide more than half of the support for the tax year for the qualifying person. If the dependent's incarceration is less than a few months, then the taxpayer may be the primary support for the dependent. However, if the inmate is incarcerated more than six months, then it is likely that the state or federal government is providing more than half of the support for the year. Whether a taxpayer is eligible under this criterion depends on the individual facts and circumstances of the case.
- No Charitable Contribution: A taxpayer may contribute to the inmate's commissary account or even finance his court proceedings, but none of these payments are tax deductible. The rules on charitable contributions are clear that donations that are intended to benefit a single individual can never be deducted (only contributions to qualified charitable organizations are eligible).
If an incarcerated person needs to file a federal tax return, then he or she could authorize another person to complete it by executing either a durable power of attorney or signing Form 2848 (Power of Attorney and Declaration of Representative) which will permit another person to deal with the Internal Revenue Service on your behalf. Failing to file a timely tax return or failing to pay any taxes owed when due, even if incarcerated, can lead to penalties and interest owed. These unique circumstances may create issues best answered by a tax lawyer or an enrolled agent.
If you or a loved one have questions about the tax liabilities of incarcerated persons or need to file a tax return, then do not hesitate to contact the attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.