Filing as Head of Household (HOH) can save up to $8,000 per year over filing as single. Therefore, it is critical to evaluate the post-divorce tax filing status for each party when negotiating a settlement. This requires thought and agreement beyond determining who will claim a child as a dependent.
Most people are under a misconception that claiming a child as a dependent entitles them to file HOH. To qualify, you must satisfy all of the following requirements:
1. You must be unmarried at the end of the year or live apart from your spouse for more than six months;
2. You must maintain a household for your child (even if you do not claim them as a dependent), or a dependent parent, or other qualifying dependent relative;
3. The household must be your home and generally must also be the main home of the qualifying dependent (i.e. they live there more than half the year);
4. You must provide more than half the cost of maintaining the household; and
5. You must be a U.S. citizen or resident alien for the entire tax year.
As indicated above, a taxpayer does not need to claim a dependency exemption to file HOH. So, for a custodial parent, even in years when you give (by completing IRS Form 8332) the dependency exemption to you ex-spouse, you can still file HOH.
The key to ensuring HOH filing status generally lies in the custody arrangement. If an agreement provides joint custody, it may be helpful to indicate in the agreement which child lives with which parent for more than one-half of the year. If there are two children, both parents can qualify as HOH, so long as one child lives with one parent more than half of the year, and the other child lives with the other parent more than half of the year. If audited, the parents will need to provide evidence that the dependent child spent more than 182 nights with the appropriate parent.
Note that if one qualifies as HOH, they generally qualify to benefit from any related dependent care credit and/or Earned Income Tax Credit that may be applicable.
The party taking the dependency exemption generally qualifies to benefit from the child tax credit and any extra stimulus rebates that may be provided in a given tax year.
The next time you discuss who claims the kids, expand your discussion to include the impact on filing status and the related tax credits to ensure your clients maximizes their tax benefits.
