head of household filing status: Lessons learned
The rules for using the Head of Household (HOH) filing status changed significantly in 2005 (see January/February 2006 Tax News, "Changes in store for head of household filers"). Because of the federal law changes, we re-wrote the HOH audit questionnaire and added some new questions. The changes created some issues that you should be aware of when your clients file their 2006 tax returns.
e-Filers: Be sure to review your client's HOH questionnaire
If your client will be filing electronically, be sure to review answers on the HOH questionnaire. In 2005, many taxpayers inadvertently filed electronic questionnaires that had the wrong answers on some of the new HOH questions. In some cases, this occurred when commercial software programs defaulted to a "no" response when a question was left unanswered. In other cases, the taxpayer or preparer simply imported the 2004 HOH audit questionnaire into the 2005 tax return without review, and the same "no" answers were transmitted to us. In both situations, the "no" answers caused us to send assessments, which we canceled when taxpayers gave us correct information.
Understand the gross income requirement for HOH
Aside from the e-file problems for tax year 2005, the most common new head of household audit issue is associated with the "gross income" requirement for a qualifying relative. The HOH questionnaire asked this question: "Was your qualifying person's gross income less than $3,200 in 2005?" Under the law, a qualifying relative cannot have gross income over the federal exemption amount for the tax year in question. Many taxpayers answered this question incorrectly, and received an assessment as a result. Our analysis revealed two different scenarios:
- Taxpayers who claim a parent as their qualifying relative. Gross income for head of household purposes only includes income that is taxable to the federal government. It does not include welfare benefits, or the non-taxable portion of Social Security income. Many taxpayers who claimed a retired parent as their qualifying person answered "no" to the gross income question, even though the parent's only income was from Social Security benefits. We issued a number of unnecessary assessments, which were later withdrawn.
- Adult children whose gross income met or exceeded the federal exemption amount. Before 2005, an adult child, living in the taxpayer's home, could qualify the taxpayer for head of household no matter how much income the adult child earned. Under the new law, an adult child over the age of 23, or an adult child over the age of 18 who is not a full time student, can no longer qualify the taxpayer if the child's gross income equals or exceeds the federal exemption amount. Many taxpayers received assessments even though their adult child may not have worked full time and may have qualified them in previous years.
Where to find assistance
Here are some helpful resources when claiming the head of household filing status for your clients:
- The 2006 personal income tax booklets provide general rules for qualifying as head of household.
- FTB Publication 1540, California Head of Household, provides detailed information. It includes general requirements, detailed self-tests, definitions of pertinent terms, and a list of frequently asked questions. Download and print a copy from our Website, or place an order by calling (800) 338-0505.
- Our HOH Webpage has the same comprehensive information as the Publication 1540. Find it on our Website at www.ftb.ca.gov.