Filing status is one of the primary elements about tax returns learned in an Enrolled Agent course, but often entails some complexity when put into practice. Selection of filing status affects a person’s tax rate, standard deduction, and eligibility for certain tax credits. This step is crucial before proceeding to report income and deductions.
Unfortunately, filing status choices for some cases are not always clear when responding to either Enrolled Agent exam questions or live taxpayers. An EA can simplify the process by starting with the basic question of whether a person is married or unmarried. Of course, a recently widowed individual presents a complication. This situation allows the taxpayer to file a joint tax return for the year of the spouse’s death.
In general, married individuals are confronted with two choices of filing status – joint or separate. Many people who are married and choose to file separately have the mistaken belief that they are entitled to use the filing status “head of household.” Of course, Enrolled Agent study materials clarify this matter. Head of household taxpayers are unmarried, have a qualifying person living in their homes for more than half the year, and pay half the cost of keeping up their homes for the year.
Questioning of a taxpayer is imperative for an Enrolled Agent to fully understand the circumstances and accurately deploy EA training. Selecting head of household status necessitates assuring that another individual living in someone’s home is not contributing most of the household costs. This is obviously a troubling event when the other individual is the taxpayer’s spouse. These people must use married filing separately if they choose not to file a joint tax return. However, a cohabitating unmarried couple with a child as a qualifying person can use head of household status for the taxpayer who pays most of the household upkeep.
In addition, married individuals are “considered unmarried” under the eligibility rules for head of household status if they have a legal separation agreement on the last day of the year or lived apart from their spouses for at least the last six months of the year. This causes some tricky investigative questions by an Enrolled Agent tax preparer of anyone considered unmarried for head of household purposes. Temporary efforts at reconciliation after July 1 will invalidate the considered unmarried position. Moreover, many states do not even have legal separation; so Enrolled Agents should familiarize themselves with their state laws.
The next hurdle with filing status is determining whether a person has dependents. In general, a child dependent is a qualifying person for filing as head of household. However, that is not true if the dependency exemption is claimed by a non-custodial parent who is allowed to claim the child dependent by agreement of the custodial parent. In fact, a taxpayer may file as head of household by using a qualifying child that is claimed as a dependent by the non-custodial parent. The key component concerning this issue is that only custodial parents may consider their children as qualifying them for head of household status.
A person other than the children of a taxpayer may also be dependents who qualify the taxpayer as head of household. These include stepchildren, foster children, and siblings as well as descendants of these individuals. Even parents and grandparents who are claimed under the qualifying relative rules may cause taxpayers to file using head of household status. However, these taxpayers must meet the other conditions. For instance, no residency requirement is imposed for claiming these qualifying relatives as dependents. But, head of household status does require the qualifying person live with the taxpayer for half the year.
Enrolled Agents must be alert to circumstances where taxpayers have dependents, but do not qualify for head of household filing status. Not all dependents are automatically qualifying persons for head of household. Plus, some taxpayers with dependents do not pay more than half of the cost for keeping up their homes. These unmarried taxpayers must file as single.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.