Claiming 'Head of Household' Just Got Harder

Assume the woman has little or no income and that the man provides for all three. For 2004, the man could claim the woman and child as dependents and file his return as a head of household, resulting in lower taxes for him.

But for 2005, the man cannot use the child to claim head-of-household status because the child is the "qualifying child" of the child's mother.

"Under the old law, because the primary test was the support test, the man could have gotten head-of-household by supporting the child. Now the primary test is the relationship test, and he would fail that because there is a custodial parent who meets the test," said Mark Luscombe, a lawyer and certified public accountant with CCH Inc., a tax analysis and publishing firm in Riverwoods, Ill.

The mother can claim the child as a dependent, but if she doesn't have income, the dependency exemption is of no value, he noted.

A casual reading of instructions on the Internal Revenue Service's Web site could leave a taxpayer with the impression that the man in the above example might claim the woman as a "qualifying relative" and use her to file as head of household, but that is not the case, as you'll find after reading the footnotes.

"If someone is your dependent merely because you're supporting him, and he lives with you . . . that's a qualifying relative" but doesn't get you head of household, Perlman said.

Also tightened is the definition of a "foster child," which now requires that for the taxpayer to claim head-of-household, the child must be placed in the taxpayer's home by some authorizing agency, such as a court or government office, she said. In the past, it was enough for the child to live there and be supported by the taxpayer.

Couples in the situation above "have several choices," Perlman said, although it's too late for 2005. "They could get married. Then the child would be his stepchild. He could have the child placed with him," such as by going to court and getting custody.

And in one other change some people could find unfavorable, Perlman said, taxpayers are now barred from splitting up the benefits of a dependent child.

"You can't have Grandma take the dependency exemption and Mom claim the child for earned-income tax credit. You used to be able to do that. Now, the smart thing to do is what is the best advantage to the family," such as figuring out whether Mom's EITC benefit is worth more than Grandma's claims for dependency exemption, she said.

At the same time, Perlman said, the rules have been eased for disabled adult children. In the past, the parent had to be providing more than half of the child's support. That has been rephrased to say that the parent can claim the child as long as the child isn't providing more than half of his or her own support. This allows a parent to claim a child who is getting third-party support, such as from a government program, even though the parent isn't actually providing more than half the child's support.

However, Perlman also predicted a lot of disputes over what constitutes third-party support and what is deemed to be the child's own income.

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Workers unhappy that employers have frozen their pension plans are increasingly turning to the Internet to supply information and gain support. The latest such site, set up by the Pension Rights Center and the Communication Workers of America, is http://www.verizonretirementwatch.com/ , aimed at Verizon Communications Inc., which recently froze its pension plan for management workers. It joins a couple aimed at International Business Machines employees, whose plans were also recently frozen. Those are http://www.cashpensions.org/ and http://www.allianceibm.org/ , the latter in conjunction with the CWA.

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The electronic tax-return filing season opened Friday for e-filing 2005 returns, a good idea for those expecting substantial refunds. This is the 20th anniversary of e-file, which the IRS calls "one of the most successful and popular electronic financial programs in the world."