Filing as the head of household

SC&H Group accountants also address capital gains, funeral deductions

Tax Talk 2006 Q&A

February 05, 2006|By JIM WILHELM, STUART RUDO AND GREG HORNING | JIM WILHELM, STUART RUDO AND GREG HORNING,SPECIAL TO BALTIMORESUN.COM's tax-advice column features three experts from the Hunt Valley accounting firm SC&H Group answering questions about preparing your return every Monday until April 17. To be included in the following weeks, please use the form at the right side of this page to submit your questions.

Hilda Snipe, Baltimore: Can you file [as] head of household without claiming the household and without itemizing?

SC&H Group: One of the requirements of filing as head of household is that the taxpayer must maintain as his/her home a household that is their principal place of residence for more than half of the year. In addition, the household must be the principal residence for a qualifying child or other dependent.

A qualifying child must satisfy four criteria. First, he or she must be the taxpayer's child, stepchild, adopted child, foster child, sibling or stepsibling. Secondly, they must also live with the taxpayer for over half of the tax year. Thirdly, the child must be 18 or younger. An exception is made with children that are 23 or younger if attending school for at least five months of the year or are disabled. And finally, the child qualifies if the taxpayer provided more than one half of their support for the year.

The taxpayer may also claim this status if they provide more than half the support for a dependent parent. This could be true even if the parent lives in a separate household. A head of household filer may choose to either itemize their deductions or take the standard deduction and must be unmarried at the end of the tax year. The taxpayer can choose whichever strategy creates the larger benefit.

Pat, Baltimore: My husband inherited his father's house about five years ago. His brother lived in the house expense-free. The house was sold in 2005. What figure do we use to pay capital gains?

SC&H Group: Generally, inherent income tax gains on a house acquired through inheritance disappear at death. When the house is sold again at a later date, the basis is "stepped-up" to fair market value at the date of death. In other words, the gain would be the difference between the fair market value when his father passed away and the current net sales price.

Randy, Randallstown: I paid the full cost for a parent's funeral. Am I able to deduct any of that cost?

SC&H Group: Funeral expenses are only deductible on a descendant's final federal estate tax return. Any payment from a relative to cover the costs is nondeductible for income tax purposes.

If the parent was considered your dependent for more than half of the year, any medical expenses should be claimed on your individual tax return, but not the funeral expenses. If you provided more than one-half their support -- but because of their income levels, did not claim the parent as a dependent -- you may still be eligible for a medical expense deduction.

A reader from Baltimore: This may be rhetorical, but every year the government checks our returns with information it receives from our employers, county real [estate] tax office, banks, retirement and investment companies. In essence, the tax return is merely an honesty test to see if what we report matches what they found out about us. This being said, why doesn't the IRS just send a bill or refund based on the information and eliminate all the needless paperwork on April 15?

SC&H Group: You are partially correct in saying that filing a tax return is like an honesty test. The IRS does check each return for the W-2, Form 1099 income and other types of income that we report on our returns for accuracy. There are additional items that go into a tax return that the IRS does not check for on each individual return.

Certain deductions such as charitable contributions, miscellaneous itemized deductions, medical expenses, self-employed business deductions and rental deductions are not checked on every return. Many of these items that are not verified by the IRS would require documentation upon an IRS examination.

If the IRS did what the reader wanted, what would accountants do with the extra 60 hours per week from February to April 15?

Esmail Essajee, Camp Hill, Pa.: From January to August 2005, I worked in Pennsylvania. Since September, I work for a Maryland employer who, by accident, deducted Maryland state taxes, even though I was and am a Pennsylvania resident. I have received W-2 forms from both my Pennsylvania and Maryland employers. Can I get a Maryland state tax refund, and what income do I list on the Maryland state form? Just the Maryland income earned, or both Pennsylvania and Maryland income?

Also, what form do I need to use to get the refund? Thanks much.

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