Head of Household Filing Status

As I mentioned last time, the new rules for dependency (qualifying child and qualifying relative) have changed the rules for Head of Household filing status. It has to meet two qualifications.

Head of Household Qualification

1. The taxpayer must have paid over half the cost of maintenance of his/her house that served as the primary place of abode for over half the year for the taxpayer and a qualifying child or a qualifying relative.

2. The taxpayer must have been unmarried or legally separated**

** “legally separated” must be either
a) A decree of divorce
b) Separate maintenance on the last day of the year
c) Have lived apart from his/her spouse for the last 6 months of the year

Cost of Maintenance

Included:
* Real Estate Taxes
* Mortgage Interest (but not principal payments)
* Rent
* Utilities
* Upkeep and repairs
* Property Insurance
* Food consumed in the home
* Other ordinary home-maintenance expenses

Not included:
* Clothing
* Medical Expenses
* Education Expenses
* Life Insurance
* Transportation
* Food consumed off the premises
* The value of the taxpayer’s own services

Determining whether or not a taxpayer paid over half the cost of home maintenance is straightforward process: Add up the total of cost of maintenance paid by the taxpayer and others and determine whether he/she paid over 50%. If the taxpayer receives public assistance payments and he/she spends for home maintenance, the payments count as amount paid by someone other than the taxpayer.

Special Situations for qualifying relatives

1.Dependent Parents
If a taxpayer paid over half the cost of house maintenance for a parent who may be claimed as a dependent, the parent doesn’t have to meet the member of household test. In other word, the taxpayer qualifies as head of household even though his house is not the same as his/her parent’s.

(Smart tax tip)

Sometimes a single taxpayer can claim a parent as a dependent, but can’t claim the head of household filing status.

Why?The taxpayer may pay over half the parent’s total support. However he/she may not pay over half the cost of maintenance for parent’s house.

How to solve? Rearranging of financial assistance.
For example, if the parent currently pays his/her own rent and the taxpayer pays the parent’s medical bills, the taxpayer may qualify as head of household if they switch the payments for the next tax year. The parent will pay his/her own medical bills and the taxpayer will pay his/her parent’s rent.

2.Multiple Support Agreements

Usually qualifying relative has to meet the following requirements as I mentioned.

a)Relationship
b)No Q.C. of Another taxpayer
c)Support: Taxpayer provides more than 50% of the individual’s support.
d)Gross income < the exemption amount($3,200 for 2005)

However Multiple Support Agreements are one of exception for qualifying relative requirement that I didn’t mention.
Multiple Support Agreement may be made when no individual provided more than 50% of a person’s support, but two or more taxpayers together provided more than 50% of the person’s support. To qualify to participate in a multiple support agreement, a taxpayer must provide over 10% of total support for the other person. The qualified taxpayers may decide among themselves which will claim the person as the qualifying relative for dependency exemption.
Even if the person meets the support test for a qualifying relative because of a multiple support agreement, that person does not qualifying a taxpayer for head of household filing status.

3.Member of Household

Even if a person meets the member of household test for a qualifying relative because he/she lived in the household all year, the person does not qualify the taxpayer for head of household filing status. In other word, if the person is not related to the taxpayer, he/she can’t claim the head of household filing status. However, if non-family person meets qualifying relative requirements, the taxpayer still can claim dependency exemption and child care credit.

Claiming the child’s Exemption

A child may qualify a taxpayer as head of household even if the taxpayer released the child’s exemption to the non-custodial parent for the purposes of dependency and child tax credit.