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Modern Filing for Modern Families01.24.14

Modern families create confusion when it comes to filing taxes.  There are five filing statuses - Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualified Widow - but families today come in all kinds of shapes and sizes. So how do you determine which filing status applies to your modern family?  Let's look at some of the common family arrangements and how they affect income taxes.

Single Parent
Based on the Census Bureau*, more than 11 million households were single families in 2011.  Filing taxes for a single parent family seems like  it would be fairly simple, but it's not always.  

  • If the parent is the only adult in the household and they provide more than half the cost of running the home, such as rent, utilities and food, and they have dependent children or other relatives, they can usually claim the Head of Household filing status.  Of the five statuses listed above, this has the second highest standard deduction amount and the second lowest taxes. 
  • However, if the parent is still married and has not lived apart from their spouse for the last half of the year or their dependent is a relative other than a child, the taxpayer doesn't usually qualify as head of household and instead must file as Married Filing Separately which has the lowest standard deduction and the highest taxes. 
  • In addition, when filing Married Filing Separately, taxpayers do not qualify for many credits or deductions including; the Earned Income Tax Credit (EITC), the credit for Child and Dependent Care Expenses, Education Credits and deductions, the Credit for Qualified Adoption Expenses and expense deduction, or the new Health Insurance Premium Tax Credit.  
  • Single parents may also file a tax return without claiming any dependents on the return and still claim the Head of Household filing status, the EITC, and the Credit for Child and Dependent Care Expenses.  
  • Finally, whether single or married, single parent families receiving state aid to help with food, rent, and utilities may not qualify for the Head of Household filing status.  If this is the case and the taxpayer isn't married, they generally can file as Single and still claim their dependents.

Blended Families
Perhaps one of the most common family structures next to the Single Parent household is the Blended Family.  The blended family is a combination of two parents with children from previous relationships and/or from the current relationship. 

  • When the parents are married, they file a joint return and claim their children from their own relationship and any children they are eligible to from the previous relationship. Children can live with one set of parents but be claimed on the tax return of another set of parents. 
  • The custodial parent (with whom the child lives) can allow the noncustodial parent to claim a child as a dependent by providing the noncustodial parent with a signed Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.  After this, the custodial parent may still claim several important statuses and deductions, including:
    • Head of Household (if not married or doesn't live with their current spouse)
    • EITC benefits based on the child
    • Any Credit for Child and Dependent Care Expenses

And what happens when the parents in a blended family get a divorce? The short answer is, the same rules apply as before the divorce. Yes, the IRS considers all familial relationships created by a marriage to continue as a familial relationship after a marriage has ended.

An example: If Tom and Jane get married and Jane brought three children in the marriage, then they divorced and Tom continues to support the three children, Tom is still considered a parent to the children for tax purposes. Likewise, Jane's mom continues to be a qualifying relative for Tom after the divorce is final is she continues to live with Tom and meet the other requirements.

Same-Sex Marriage
New this year, the IRS recognizes same-sex couples as married taxpayers if they were legally married.  

  • Beginning September 16, 2013, married same-sex taxpayers must file as either married filing jointly or married filing separately on their federal income tax returns. 
  • However, states can determine their own rules on same-sex marriage and many states do not recognize these as legal marriages.  So if a same-sex couple was legally married in a state that recognizes same-sex marriage, but lives and files taxes in a state that doesn't, the taxpayers will file a married federal return and file individual single state tax returns. 
  • Because the state filing status does not match up to the federal return as filed, these individuals can't e-file their state tax returns and must mail them.  A word or caution here, married filing separately tax returns result in the lowest standard deduction amount, the highest tax amounts, and do not allow many tax credits and deductions. 
  • In many states, cohabitating in a same-sex relationship is illegal, meaning taxpayers can't claim a non-working partner as a dependent.  In no case can a non-related dependent qualify a taxpayer for Head of Household filing status on their federal return.

Multi-generational Households
According to AARP, more than 22 million households provide care for family members over 50. Many of the households choose to have parents live with them and their children, creating a household with three and sometimes four generations under one roof, with several tax implications.

  • The children of the elderly parents are usually the provider for their own children and their parents.  These taxpayers can often claim Head of Household filing status if they aren't married, based on either a dependent child or a dependent parent. 
  • Many times the parent may not make enough money to support themselves, but they make too much money for their child to claim them as a dependent. If you are in this situation, take the time to work up a dependent worksheet for each parent and don't include any of dad's income and expenses on mom's worksheet and vice versa.  It is not uncommon to find that one of your parents, usually mom, can be claimed as a dependent while the other can't because of a small taxable pension of more than the annual exemption amount ($3,900 this year). 
  • If your parent makes too much to claim them as a dependent, but you do provide more than half of their support, you may still be able to claim any medical expenses you pay.  Rearrange which of your parent's expenses you pay and which they pay to help you with the tax break.
  • If your parent is providing daycare for your child you can claim the credit for what you are paying them, but be careful or you pay may push your parent's income over the maximum allowed and still claim them as a dependent.

These are just a few of the tax ramifications that can be found in the modern family. Sound complicated? Well, in some cases it is - but worth it to be able to support and live with the people you love. See your local Jackson Hewitt Tax Professional to get the lowest taxes and all tax credits and deductions you and your family are eligible for.

 

 

 * http://www.census.gov/hhes/families/data/cps2013F.html - Family Household F table series