The ability to file as Head of Household comes with significant tax advantages if you qualify. The tax rates for this filing status in 2018 are as follows:
- If taxable income is not over $13,600, then the tax is 10% of taxable income.
- If taxable income is over $13,600 but not over $51,800, then the tax is $1,360 plus 12% of the excess over $13,600.
- If taxable income is over $51,800 but not over $82,500, then the tax is $5,944 plus 22% of the excess over $51,800.
- If taxable income is over $82,500 but not over $157,500, then the tax is $12,698 plus 24% of the excess over $82,500.
- If taxable income is over $157,500 but not over $200,000, then the tax is $30,698 plus 32% of the excess over $157,500.
- If taxable income is over $200,000 but not over $500,000, then the tax is $44,298 plus 35% of the excess over $200,000.
- If taxable income is over $500,000, then the tax is $149,298 plus 37% of the excess over $500,000.
Unfortunately, it is the most misunderstood and confusing filing status. To qualify as Head of Household, you must meet ALL of the following requirements.
I. UNMARRIED OR CONSIDERED UNMARRIED ON THE LAST DAY OF THE TAX YEAR - Obviously, this condition is met if your marital status is single. 26 U.S.C. §2(b)(1). However, you may be "considered unmarried" on the last day of the tax year for purposes of head of household status (even if legally married) if you meet all the following tests:
- a. You file a separate tax return from your spouse. 26 U.S.C. §7703(b)(1).
- b. You paid more than half the cost of keeping up your home for the tax year. 26 U.S.C. §7703(b)(2).
- c. Your spouse didn't live in your home during the last six months of the tax year. 26 U.S.C. §7703(b)(3).
- d. Your home was the main home of your child, stepchild or foster child for more than half the year. 26 U.S.C. §7703(b)(1).
- e. You are able to claim an exemption for your child. 26 U.S.C. §7703(b)(2).
II. QUALIFYING PERSON LIVED WITH YOU MORE THAN HALF THE YEAR - The following persons are considered "qualifying persons" IF they lived with you more than half the year. 26 U.S.C §2(b)(1)(A):
- 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).
- b. "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).
III. YOU PAID MORE THAN HALF OF THE COST OF KEEPING UP A HOME FOR THE YEAR - You must pay more than half of the cost of keeping up a home for the year. 26 U.S.C. §2(b)(1)(B).
- Costs to Include - Rent payments, mortgage interest, real estate taxes, home insurance, home repairs, utilities, and food consumed in the home.
- Costs Not to Include - Clothing, education, medical treatment, vacations, life insurance and transportation.
The Head of Household filing status has more significant tax savings than filing single or married filing separately. Prior to the tax year beginning Jan. 1st, 2018, a head of household filer can claim a standard deduction amount of $9,550.00. The passage of the Tax Cuts and Jobs Act of 2017 (the "Act") increased this amount significant. For tax years beginning after Dec. 31st, 2017 and before Jan. 1st, 2026, the standard deduction is increased to $18,000.00. If the "sunset provision" on this standard deduction increase is not extended by 2026, then the standard deduction will revert to pre-Act levels indexed for inflation.
The increase in the standard deduction is intended to off-set the suspension of claiming personal exemptions for dependents for tax years beginning after Dec. 31st, 2017 and before Jan. 1st, 2026. Despite this suspension, the rules for defining an exemption remain for determining whether you have a qualifying child or qualifying relative for head of household purposes. If the "sunset provision" on the suspension of personal exemptions is not extended by 2026, then the exemption amount will revert to pre-Act levels indexed for inflation.
Head of household status is often overlooked because the taxpayer wrongfully believes he or she is ineligible. Most people think they are ineligible because they are still legally married or think "qualifying relative" means blood relative when it is not necessarily the case. However, some people purposely or fraudulently claim the benefit for fictitious or ineligible children or relatives and are dishonest about the fact that they do not pay half the cost of keeping up the home. As a result, Congress has imposed due diligence requirements on tax return preparers in determining someone's ability for claiming head of household status.
Even the tax return preparer has duties under the law to ensure that the CTC rules are followed. 26 U.S.C. §6695(g)(1) states "[a]ny person who is a tax return preparer with respect to any return or claim for refund who fails to comply with due diligence requirements imposed by the Secretary by regulations with respect to determining ... eligibility to file as a head of household... shall pay a penalty... for each such failure." For tax year 2018, the penalty is $520.00 per failure. Treas. Reg. Section 1.6695-2 outlines the following due diligence requirements for head of household:
- Complete and submit Form 8867 - Paid Preparer's Due Diligence Checklist with the tax return.
- Complete all the necessary worksheets showing how you determined eligibility.
- Ask the client all the necessary questions to determine eligibility. It is good practice to keep a record of the questions asked and the answers provided.
- Keep a copy of all the forms, worksheets and tax documents as well as a record of how and when the information to determine head of household eligibility.
It is certainly worth the time investment to talk to an experienced tax professional to determine if your unique situation would make you eligible to file as head of household. Otherwise, you may be paying too much money to the federal government. If you have questions about head of household status or any other aspect of federal taxation, do not hesitate to contact the attorneys at Kershaw, Vititoe & Jedinak PLC.