Filing with a family member renting a room below fair market value

[jwellingtoniii]

I own a home in Michigan and work full-time. My retired disabled mother (not a "dependent") moved in last year and informally "rents" a room from me in my personal home for $300 month cash (well below fair market value for renting a room) to help with bills after we both hit some hard times. She helps me financially; I help her get around. I am not making a profit in this like a landlord would.

She is concerned that by not filing it as rent/income on my part that I could be prosecuted for not reporting income, and/or that by not filing it as rent on her part, her disability benefits (tied to her tax return) will be cut for not having a rent to pay. It's screwy. TurboTax Premier says it does not qualify as rental income and to report it under Misc Income, where I am instantly hit with a tax bill.

Personally, I do not consider it income. I am not renting for profit nor am I pocketing the money. I'd say it's closer to being a monthly gift but then that doesn't show up on her return as a rent. What is the legally, ethically correct way to file this?

[xmasbaby0]

This sounds like family cost sharing which should not be entered on a tax return.   Does your mom get Social Security ---or something else?   Why is she so afraid her benefits will be reduced?   There are certain kinds of benefits that require the recipient to show they pay rent----so you need to be clear about the rules she has to abide by.     If she is getting Social Security disability and that is her only income, she is not even required to file a tax return.

[jwellingtoniii]

Thank you for responding so quickly.

I asked her about your questions: she was collecting Disability, but has since aged into Social Security. She says that by filing a return, even though not needed, as a 'Head of Household', she would be afforded additional benefits. But as a H.O.H., she would have to prove she is living largely independently, I guess. So, proof rent, mortgage payment or property taxes, etc, which she had before. Legally & ethically speaking, I suppose she would have to stop doing that.

As for the rules you mentioned, what do you mean? Like I produce a document stating "no smoking, no alcohol" etc?

[xmasbaby0]

If her only income is Social Security disability, she is not required to file a tax return at all unless she has a 1095A for marketplace health insurance.     Does she have any other income like a pension, investment income, income from a retirement account?

And as for filing as Head of Household....no.   She may have filed that way once upon a time, but in order to file HOH you have to claim a qualified dependent.  It has nothing to do with actually owning a house.   The "benefit" of filing HOH is a higher standard deduction.   But that does not matter if she pays no tax now.

No----not rules about smoking etc.   There are certain other kinds of disability income that would have rules that require her to show that she paid rent.   There is no such rule for Social Security disability.   

Neither one of you has any reason to enter anything about rent on a tax return.