Head of household: Hard to Qualify, But Worth It

                                Ellen Goodman, American Journalist

Tax legislation is often paternalistic. An example of this is the favorable treatment of single parent families by the income tax code. No politician wants to see a newly widowed or divorced constituent on the evening news being evicted from his or her residence because he or she can’t pay their taxes.

The tax break for these one-parent families is the head of household filing status.

The tax break is generated in two places on the second page of the income tax return. Page two begins with the Adjusted Gross Income (AGI). From the AGI the personal deduction and the standard deduction are deducted to determine taxable income. The personal deduction does not distinguish between head of household or single filing status. It is the product of $3,700 (in 2011) times the number of exemptions, which for a parent and one child would be two.

Also from the AGI, the standard deduction is taken. This is where the first break appears since the standard deduction does differentiate between head of household and single filers. Single filers get to deduct $5,700, but heads of household get to deduct $8,400. That’s already a $2,700 advantage.

Next the tax is calculated according to the tax tables. This is where the second preferential treatment comes in. The single filer 10% bracket tops out at $8,500. The head of household 10% bracket tops out at $12,150, thus allowing the head of household filer to stay in the lowest bracket longer. The 15% bracket limits are $34,500 and $46,250, respectively. This preferential treatment for heads of household continues until the 33% brackets are reached when both top out at $379,150.

Consider what the advantages are for varying values of AGI. At very low incomes, say $20,000, the percent advantage is a whopping 40%. At $30,000 it’s 27%. Between $40,000 and $80,000 the advantage then varies in the mid-teens of percent. It then trails off to the low teens and vanishes almost completely at much higher incomes.

Since the tax tables are a step function, the maximum advantages appear when taxable income is at the top of the head of household brackets. For instance, the advantage is 24.3% with an AGI of $62,050 which yields a taxable income of $46,250, the top of the 15% bracket.

How does one qualify for head of household filing status? It’s complicated.

You must be unmarried or “considered unmarried” on the last day of the year;

You must have paid more than half the cost of keeping up your residence for the year; and

A “qualifying person” (the dependent) must have lived with you in your home for more than half the year.

In figuring if you paid more than half the cost of keeping up your home, do not include the cost of expenses such as clothing, education, medical treatment, vacations, life insurance, or transportation. Also, do not include the rental value of a home you own or the value of your services or those of a member of your household.

What does “considered unmarried” mean? It, too, is complicated.

You file a separate return;

You paid more than half the cost of keeping up your home for the tax year;

Your spouse did not live in your home during the last 6 months of the tax year; (“Temporary absences” do not count as “not living in your home”)

Your home was the main home of your child, stepchild, or foster child for more than half the year; and

You must be able to claim an exemption for the child unless the only reason you cannot claim the exemption is a divorce agreement.

Most married couples who file as head of household do so incorrectly. If you are getting that advice from your tax preparer, beware. Did I mention it was complicated?