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Thu, Feb 02 2006 - 09:09 PM

claiming head of household just got harder

Claiming 'Head of Household' Just Got Harder

By Albert B. Crenshaw

Sunday, January 15, 2006; Page F02

When it comes to income taxes, a "dependent child" is a dependent child, yes? Well, yes, since 2004, when Congress more or less unified the five different definitions of the term.

So now the one definition applies when calculating head-of-household filing status, the exemption for a dependent, the child tax credit, the child and dependent care credit and the earned-income tax credit.

But the new definition in some ways tightens up the rules, particularly concerning head-of-household status, and not everyone will benefit. Already, tax preparers working with low- and moderate-income families and the elderly are finding that some of their clients who could file as heads of households in the past will not be able to do so on their 2005 returns.

That change would typically mean higher taxes because head-of-household status carries with it brackets that are much more favorable than those for single taxpayers.

One such group is single parents who have an unmarried, adult child living with them.

In the past, such parents could claim head-of-household status even if the child were older, had a lot of income and even if the parent could not claim a dependency exemption for him.

Under the new rules, the parent must be able to claim a dependency exemption for the child -- a "qualifying child" in tax jargon -- to qualify for head-of-household status. And for 2005, a child cannot be a qualifying child if he or she turned 19 by the end of the year (or 24 for a full-time student).

One tax preparer said recently that an elderly client who has been able to file as head of household in the past because her adult daughter lives with her will not be able to do that this year. The result will be instead of paying no tax, she may have to pay as much as $2,000 for 2005.

An older child might still be a "qualifying relative," enabling the parent to claim head-of-household status if certain other tests are met, but not if the child's income is over $3,200 a year.

Thus, the parent of an older child who has a reasonable amount of income may well pay more tax this spring.

Another group that may be affected is people with what Jackie Perlman, senior tax-research coordinator at H&R Block's world headquarters in Kansas City, Mo., called "complex family situations."

For example, she said, consider the case of an unmarried man and woman living together with the woman's young child. Such a situation is "pretty typical" of a lot of families H&R Block encounters, she said.

Assume the woman has little or no income and that the man provides for all three. For 2004, the man could claim the woman and child as dependents and file his return as a head of household, resulting in lower taxes for him.

But for 2005, the man cannot use the child to claim head-of-household status because the child is the "qualifying child" of the child's mother.

"Under the old law, because the primary test was the support test, the man could have gotten head-of-household by supporting the child. Now the primary test is the relationship test, and he would fail that because there is a custodial parent who meets the test," said Mark Luscombe, a lawyer and certified public accountant with CCH Inc., a tax analysis and publishing firm in Riverwoods, Ill.

The mother can claim the child as a dependent, but if she doesn't have income, the dependency exemption is of no value, he noted.


A casual reading of instructions on the Internal Revenue Service's Web site could leave a taxpayer with the impression that the man in the above example might claim the woman as a "qualifying relative" and use her to file as head of household, but that is not the case, as you'll find after reading the footnotes.

"If someone is your dependent merely because you're supporting him, and he lives with you . . . that's a qualifying relative" but doesn't get you head of household, Perlman said.

Also tightened is the definition of a "foster child," which now requires that for the taxpayer to claim head-of-household, the child must be placed in the taxpayer's home by some authorizing agency, such as a court or government office, she said. In the past, it was enough for the child to live there and be supported by the taxpayer.

Couples in the situation above "have several choices," Perlman said, although it's too late for 2005. "They could get married. Then the child would be his stepchild. He could have the child placed with him," such as by going to court and getting custody.

And in one other change some people could find unfavorable, Perlman said, taxpayers are now barred from splitting up the benefits of a dependent child.

"You can't have Grandma take the dependency exemption and Mom claim the child for earned-income tax credit. You used to be able to do that. Now, the smart thing to do is what is the best advantage to the family," such as figuring out whether Mom's EITC benefit is worth more than Grandma's claims for dependency exemption, she said.

At the same time, Perlman said, the rules have been eased for disabled adult children. In the past, the parent had to be providing more than half of the child's support. That has been rephrased to say that the parent can claim the child as long as the child isn't providing more than half of his or her own support. This allows a parent to claim a child who is getting third-party support, such as from a government program, even though the parent isn't actually providing more than half the child's support.

However, Perlman also predicted a lot of disputes over what constitutes third-party support and what is deemed to be the child's own income
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