An Often Overlooked Head of Household (HOH) filing Status Opportunity

Kent Bone for NerdWallet.com writes: Learn more about Kent on NerdWallet’s Ask an Advisor   Question: I have two new clients, both unmarried, both with children, both share the same rental home, both share the  household expenses, both have jobs, both attend school and they are not living together as a couple. They do not share bedrooms and they each pay for themselves and their own children’s living space.  The question is can they each claim the more favorable Head of Household (HOH) filing status on their current year tax return rather than the Single filing status if they live in the same home?

Basically, if you meet the following requirements, you may be able to file as head of household (See Pub 17):

1. You are unmarried or “considered unmarried” on the last day of the year;
2. You paid more than half the cost of keeping up a home for the year;
3. You have a qualifying person who lived with you in the home for more than half the year (except for temporary absences, such as school).  Interestingly, if the qualifying person is your parent, they do not have to live with you.

In their particular situations, after a thorough lifestyle interview and expense substantiation process, my new clients do appear meet the requirements as follows:

1. They both are unmarried, not surviving spouses, or non-resident aliens;
2. They both paid more than half the cost of keeping their home (household) for the year;
3. And they both have a qualifying person (a child or children), who lived with them more than half the year.

How do these facts work to meet the Head of Household requirements under section 2(b) since this is one residential unit with multiple non-related families?

1. We accept as fact that they are unmarried, not a surviving spouse, or a non-resident alien because it is their individual responses to these issues and we have no compelling reason to question their answers.
2. They meet the requirement of more than half of the cost of keeping their household for the year as follows and tax law research will support that the following realities contribute to the facts and circumstances of this arrangement to meet the requirements.
   • They share the cost of the rental unit.
   • They both live in separate bedrooms with their children and pay over half the expenses of their individual household expenses by maintaining separate personal household items such as separate telephones, food for themselves and their children, upkeep and repairs, insurance, the sharing of utilities, and separate Christmas and birthday gifts for their children.  Expenses such as cost of clothing, medical treatments, education, life insurance or vacations are not included in the determination that more than half of the household expense requirement is met.  In short they are sharing some common areas of the single unit, but their facts and circumstances appear to point to the maintenance of a separate household by each client.
   • All the relevant facts and circumstances are supported with adequate substantiation (cancelled checks, receipts) and therefore seem to point to two different households within the same dwelling.
   • The Tax Court has ruled that the extent of a household is not determined only by its physical or tangible boundaries.  In Reardon v. United States, 158.F.Supp. 745 (D.S.D. 1958), the Tax Court found that “it would be an elevation of form over substance to say only one household existed simply because only one building was involved and certain areas were used in common.”   There are numerous Tax Court case’s to support this filing status determination where multi-family dwellings that house separate families are treated as separate households when the specific facts and circumstances support the independence from one another.

In summary then, because of their individual sets of facts and circumstances and independence from one another, I believe these two taxpayers should each use the Head of Household filing status and enjoy the greater standard deduction, if used, and the reduced tax rates indicated for this filing status.    Be sure to seek experienced tax counsel for guidance and support of this position.