The tax term head of household is one of the more misunderstood tax phrases inside the U.S. tax code. However, if your situation warrants head of household status, there are two big tax benefits. First, a higher standard deduction. Second, lower effective tax rates for virtually every income level. This is great, but only if you qualify.
Three key qualifications
There are three specific rules to qualify for the head of household status:
- You are not married. First, you need to be unmarried or considered unmarried as of the last day of the year. Unmarried means single, divorced or legally separated per a court order. You can also be considered unmarried if you are legally married, but you and your spouse are separated and live in different residences for the last half of the year.
- You pay half of the cost to keep up your home. Second, you need to support yourself. You do this by showing that you provide at least half the cost to keep up your home. The IRS provides a worksheet to help you calculate this, but the idea is to add up household costs and determine that you pay more than half throughout the year. Here are examples:
- Costs to include: Rent, mortgage interest, property taxes, homeowners insurance, repairs, utilities and food eaten in your home.
- Costs not to include: Clothing, education, medical expenses, vacations, life insurance and transportation.
- There is a qualifying person living with you for at least half the year. This can be the most complicated of the three requirements. Essentially, you have a dependent that is supported by you. So if you can claim a person as a dependent and they live with you for six months, you probably meet this requirement. Beyond your son or daughter, a qualifying person can be a sibling, parent, grandchild, grandparent and other relatives. There is also a special rule for caring for your parent. You may be eligible as head of household even if your parent doesn’t live with you, as long as you provide more than half the cost of keeping up their home.
Making the right decision on filing status can save you thousands of dollars, but you have to know the rules. If you have questions regarding your current situation or have a life change that may qualify you for the head of household filing status, feel free to call.