As taxpayers we are always looking for ways to keep more of our money. If you are unmarried, one of the easiest ways to save on taxes is to file as Head of Household (HOH) instead of Single. The HOH filing status has both lower tax rates and a larger standard deduction. Together, these advantages can have a significant impact on your tax bill.
RDP taxpayers have been claiming HOH status under varying circumstances for many years. Some have a child living in the home while others have been claiming their non-working spouse as a dependent in order to meet HOH requirements. In some cases, though technically incorrect, RDPs have even both filed as HOH when the couple has more than one child.
There are certain requirements, commonly referred to as “tests,” that must be met in order to claim HOH status. Unfortunately, the community property income splitting rules have caused most RDPs to suddenly fail to satisfy the requirements.
There are three tests and they must all be met to qualify for HOH status:
- Taxpayer must be unmarried, or “considered to be unmarried.”
- Taxpayer must pay for more than half the cost of keeping up the home.
- Taxpayer must have had a “qualifying person” (usually a child) living in the home more than half of the year[i].
The first test remains easy to meet since under all circumstances RDPs are still legally single for tax purposes. If you have a dependent child, the third test also remains easy to meet. In most cases however, if you don’t have a child you will no longer be able to use your dependent partner to satisfy the third test. There are additional tests to meet in order to claim a dependent partner as a qualifying person. For purposes of this discussion, only one of these tests is relevant. The partner must have gross income of less than $3,700; this is known as the “gross income test.”
Now that wages, and most other types of income, are reported 50/50 between the partner’s two returns, it is almost certain that both partner’s incomes will exceed $3,700[ii]. With no child or partner who can be considered a qualifying person the third HOH test is not met and the taxpayer must file as Single.
The more common, yet less complex, reason for losing HOH status is failing to meet the second “cost of keeping up the home” test. Since, typically, under community property rules all income is split 50/50, neither partner can qualify as paying for more than half of the cost of keeping up the home. HOH status is lost and both partners must file as Single.
Luckily with some strategic planning, assuming the first two tests are met, there are ways to ensure that one partner can still file as HOH. All that is needed is any amount of separate income. If one partner has separate income, then their share of total income will be greater than 50% and may then justify the claim that they provide more than 50% of the cost of keeping up the home.
What is separate income then? There are several income sources that are intrinsically considered to be separate:
- Income from an inheritance provided that the underlying assets earning the income have remained physically separate and have not commingled with community property assets.
- Distributions from retirement funds that were earned, partially or wholly, prior to registration or marriage.
- Distributions from IRA accounts are always considered separate regardless of whether they were funded by property otherwise considered as community.
- Social Security benefits that were earned, partially or wholly, prior to registration or marriage.
There are a number of other grey area income sources, such as Health Savings Account distributions, to which the IRS has made no comment. Income may also be designated as separate by creation of a separate property agreement. Regardless of the source of the separate income, having it or creating it can be a financially rewarding planning strategy. You may want to consult your tax professional to determine how, and if, you can maintain your eligibility to file as HOH.
[i] There is an exception to this rule. If you have a parent that you can claim as a dependent, they do not have to live with you.
[ii] This creation of reportable income also usually means that the non-working spouse must now file their own tax return when they didn’t before.