The ability to file as Head of Household comes with significant tax advantages if you qualify. Unfortunately, it is the most misunderstood and confusing filing status. To qualify as Head of Household, you must meet ALL of the following requirements.
1. UNMARRIED OR CONSIDERED UNMARRIED ON THE LAST DAY OF THE TAX YEAR - Obviously, this condition is met if your marital status is single. 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.
b. You paid more than half the cost of keeping up your home for the tax year.
c. Your spouse didn't live in your home during the last six months of the tax year.
d. Your home was the main home of your child, stepchild or foster child for more than half the year.
e. You are able to claim an exemption for your child.
2. 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:
a. "Qualifying Child" - includes a son, daughter or grandchild of any age who is single (or is married and you can claim that child as an exemption)
b. "Qualifying Relative" - if that person meets all four of the following tests:
i. That person is not your "qualifying child"
ii. 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).
iii. That person's gross income for the year is less than $4,050.00.
iv. You provided more than half of a person's total support during the calendar year.
3. 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.
a. Costs to Include - Rent payments, mortgage interest, real estate taxes, home insurance, home repairs, utilities, and food consumed in the home.
b. 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 standard deduction increase 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 improperly claimed for two reasons: the taxpayer wrongfully believes he or she is ineligible, or it is alluring to fraudulently claim the tax benefit. Most people think they are ineligible because they are still legally married or think "qualifying relative" means blood relative but they may be wrong. However, some people purposely claim the benefit for qualifying 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 with the Tax Cuts and Jobs Act of 2017. Beginning in tax year 2018, tax preparers must comply with new regulations in verifying eligibility or trigger a base penalty of $500.00 (adjusted each year for inflation).
The Internal Revenue Service has been increasing the rate of auditing head of household filers due to the growth in wrongfully claiming the status. This should not be seen as a chilling effect as long as you take the time to educate yourself. If you are separated from your spouse in a pending divorce but meet other requirements, you may realize greater tax savings as a head of household filer rather than married filing separately. Consulting with a knowledgeable federal tax practitioner can kept you from running afoul of violating federal law and save you thousands of dollars in tax payments.