Franchise Tax Board

1
Franchise Tax Board

• Head of Household

FSSAS Linda Watts Ruth Wagner
2
Head of Household
Franchise Tax Board
3
Agenda

• Registered Domestic Partners

• Head of Household (HOH) Program Overview

• Requirements Discussion

• Case Studies

4
Starting 01.01.07 Registered Domestic
Partners (RDPs)

• California now treats a registered domestic
  partner (RDP) the same as a married person.

• RDPs are generally required to file a joint or
  separate return the same as a married person.

• Any reference to spouse in this presentation also
  pertains to an RDP.

5
Head of Household (HOH) Program Overview

• Audit Process
• Legal Issues

• General Rules
• Denial Reasons

6
Process

• Electronic Filer

• 1st Audit Letter

• 2nd Audit Letter

• 3 Ways for Taxpayers to Respond
• Mail
• Fax
• Web

7
Process continued

• Notice of Proposed Assessment (NPA)
• Audit letter included with no response to NPA

• Acceptance letter

8
Requirements
Discussion
9
General Rules ALL must apply

• Taxpayer must be either unmarried and not an RDP
  or meet the requirements to be considered
  unmarried or considered not in a registered
  domestic partnership on the last day of the year.

2. Taxpayer must not be a nonresident alien at
any time during the year.
10
General Rules ALL must apply continued

• Taxpayer paid more than half the cost of keeping
  a home for the year.

4. Taxpayers home is the main home for
themselves and a qualifying person who lived
with them for more than half the year. (Note A
taxpayers parent/stepparent is the exception.)
11
General Rules ALL must apply continued

• The qualifying person is the taxpayers
  qualifying child or qualifying relative.

6. The taxpayer must be entitled to a Dependent
Exemption Credit for the qualifying child or
qualifying relative.
12
Who is a Qualifying Person?

• Qualifying Child
• Relationship Test

• Age Test

• Support Test

• Special Test

• Time In the Home (Residency) Test

13
Who is a Qualifying Person? continued

• Qualifying Relative
• Relationship Test

• Gross Income Test

• Support Test

• Not a Qualifying Child Test

14
Who is Unmarried and not an RDP?

• Never married and never an RDP.

• Marriage or registered domestic partnership
  annulled and never remarried or entered into
  another registered domestic partnership.

• Taxpayers spouse/RDP died in a prior year and
  taxpayer never remarried or entered into a
  registered domestic partnership.

• Final decree of divorce or legal separation and
  not remarried or entered into a registered
  domestic partnership.

• Spouse/RDP is a nonresident alien.

15
Who is Considered Unmarried or Considered Not in
a Registered Domestic Partnership?

• The qualifying person is taxpayers birth child,
  stepchild, adopted child, or eligible foster
  child.

2. Taxpayer filed a tax return separate from
their spouses/RDPs tax return.
3. Taxpayer paid more than half the cost of
keeping up their home for the year.
16
Who is Considered Unmarried or Considered Not in
a Registered Domestic Partnership? continued

• Taxpayer did not live with their spouse/RDP
  during any of the last six months of the tax
  year (July 1 Dec 31).

5. Taxpayers home was the main home for taxpayer
and their child for more than half the year.
17
Who is Considered Unmarried or Considered Not in
a Registered Domestic Partnership? continued

• Taxpayer must be entitled to claim a Dependent
  Exemption Credit for their child.

18
Legal Issues
Counting Qualifying Time

• Taxpayer Unmarried and not an RDP
• If the taxpayer was married or an RDP at any time
  during the year, but was divorced, legally
  separated, or their registered domestic
  partnership was legally terminated by the last
  day of the year, they count the time with their
  child as follows

19
Counting Qualifying Time continued

• Half of the days the taxpayer and the child lived
  in the taxpayers home with the spouse/RDP
  (ex-spouse/ex-RDP).
• and
• All of the days the taxpayer and the child lived
  together in the taxpayers home without the
  spouse/RDP (ex-spouse/ex-RDP).
• (Appeal of William Tierney)

20
Counting Qualifying Time continued

• Married Taxpayer
• Taxpayers who are married or an RDP as of the
  last day of the tax year must also apply the
  Tierney rules.
• If the spouse/RDP lives in the home at any time
  during the last six months, the taxpayer does not
  meet the requirements to be considered unmarried
  or considered not in a registered domestic
  partnership and cannot qualify for head of
  household filing status.
• (Appeal of Barbara Godek)

21
Example

• Husband, wife, and child lived together until
  4/30 when the husband moved out.
• The child continued living with his mother until
  7/31 and then moved in with his father.
• Their divorce was final on 8/31.

22
Example continued

• January April 4 monthsEach parent is allowed
  2 months

Ex-Wife has 3 additional months(May July) 2
3 5 months total
Ex-Husband has 5 additional months(Aug Dec) 2
5 7 months total
23

• Eligible Foster Child
• The child must be placed with the taxpayer by an
  authorized placement agency or by a judgment,
  decree, or other order of a court of competent
  jurisdiction. Generally, formal placement ends
  when the child reaches the age of 18.

24
Joint Custody

• A taxpayer who shares joint physical custody of a
  child does not automatically qualify for head of
  household filing status. The taxpayer and the
  child must live together in the taxpayers home
  for more than half the year.

25
Joint Custody Head of Household Credit
1. Taxpayer is unmarried and not an RDP on the
last day of the tax year, or files using the
married/RDP filing separately filing status, and
lives apart from his or her spouse/RDP for the
entire year.
26
Joint Custody Head of Household Credit continued

• Pays more than half the costs of maintaining his
  or her home as the main home for a birth child,
  step child, adopted child, or grandchild.

• Maintains their home as childs main home for at
  least 146 days, but not more than 219 days.

27
Joint Custody Head of Household Credit continued

• One of the following documents defines the
  taxpayers home as the childs main home for the
  above period

• Decree of dissolution of marriage or registered
  domestic partnership.

• Decree of legal separation.

• Written agreement entered into after the
  proceedings for divorce, dissolution of
  registered domestic partnership, or legal
  separation began, but before the final decree was
  issued.

28
Multiple Families Occupying the Same Dwelling

• If two or more families occupy the same dwelling,
  each family may be treated as keeping up a
  separate household if both of the following
  requirements are met
• Each family maintains separate finances.
• Neither family contributes to the support of the
  other family.

29
Spouses/RDPs with Separate Sleeping Quarters

• Spouses/RDPs who have separate sleeping quarters
• in the same dwelling are
• Considered members of the same household.
• Not considered unmarried or considered not in a
  registered domestic partnership for purposes of
  filing as head of household.

30
Common Denial Reasons

• Qualifying person did not meet the gross income
  test.

2. Taxpayer was married or an RDP and lived with
spouse/RDP at some time during the last six
months of the year.
3. Qualifying person did not live with taxpayer
more than half the year.
31
Common Denial Reasons continued

• Taxpayer was legally married or an RDP and
  claiming a parent or relative other than a child
  as a qualifying person.

5. Taxpayer claimed a nonrelative as a qualifying
person.
32
Case Studies
Head of Household
33
Case Study u No. 1

• The taxpayer is still legally married as of the
  last day of the year.
• The taxpayer lived with his spouse from January 1
  to November 12.
• The taxpayers teenage daughter lived with him
  all year.

34
Case Study u No. 1 continued

• Analysis
• To qualify for head of household filing status,
  the taxpayer must be either unmarried and not an
  RDP or meet the requirements to be considered
  unmarried or considered not in a registered
  domestic partnership on the last day of the year.

35
Case Study u No. 1 continued

• To be considered unmarried or considered not in a
  registered
• domestic partnership, all of the following must
  apply
• Taxpayers qualifying person is their birth
  child, stepchild, adopted child, or eligible
  foster child.
• The taxpayers tax return was filed separately
  from his spouses /RDPs return.

36
Case Study u No. 1 continued

• The taxpayer paid more than half the cost of
  keeping up his home for the year.
• The taxpayers spouse/RDP did not live in the
  home at any time during the last six months of
  the taxable year.

37
Case Study u No. 1 continued

• For more than half of the year, the taxpayers
  home was the main home for their birth child,
  stepchild, adopted child, or eligible foster
  child.
• The taxpayer was entitled to claim a Dependent
  Exemption Credit for the child.

38
Case Study u No. 1 continued

• The Determination
• This taxpayer does not qualify for the head of
  household filing status.
• Taxpayer cannot be considered unmarried. He was
  legally married and lived with his spouse from
  July 1 to November 12 which is a portion of the
  last six months of the year.

39
Case Study u No. 2

• The taxpayer is divorced as of December 31 and
  did not live with her spouse during the tax
  year.
• The taxpayers 8-year-old daughter lived with her
  for five months during the year. The daughter
  lived with the other parent the rest of the year.

40
Case Study u No. 2 continued

• Analysis
• Taxpayers home must be the main home for
  themselves and a qualifying person who lived with
  them for more than half the year.

41
Case Study u No. 2 continued

• The Determination
• The taxpayer does not qualify for the head of
  household filing status.
• More than half the year is 183 days in a leap
  year it is 184 days. (5 months is lt 183 days)

42
Case Study u No. 3

• The taxpayer was legally married, but did not
  live with his spouse during the tax year.
• The taxpayers 12-year-old brother lived with him
  from January 1 to September 1.

43
Case Study u No. 3 continued

• Analysis
• Taxpayer is legally married at the end of the
  year.
• To use the head of household filing status, the
  taxpayer must be considered unmarried.

44
Case Study u No. 3 continued

• The Determination
• The taxpayer does not qualify to file using the
  head of household filing status because a brother
  is not a qualifying person for a taxpayer who is
  considered unmarried or considered not in a
  registered domestic partnership.

45
Case Study u No. 4

• The taxpayer is unmarried and not an RDP.
• The taxpayer paid all of the costs of maintaining
  his home where his cousin lived with him all
  year.
• The cousin was 17 years old and had 2,500 in
  wages from a part-time job.

46
Case Study u No. 4 continued

• Analysis
• Taxpayers cousin is not one of the relatives
  who, by law, can qualify a taxpayer for head of
  household filing status.

47
Case Study u No. 4 continued

• The Determination
• The taxpayer does not qualify to file using the
  head of household filing status. Taxpayer does
  not have either a qualifying child or a
  qualifying relative.

48
Case Study u No. 5

• The taxpayer was divorced 15 years ago.
• Her 32-year-old son, who was unmarried and not an
  RDP, lived with her the entire year and had gross
  income of 2,000.
• The taxpayer provided more than half of her sons
  support and paid all of the costs of keeping up
  the home.

49
Case Study u No. 5 continued

• Analysis
• Taxpayer was unmarried and not an RDP (divorced).
• Taxpayer paid more than half the cost of keeping
  up her home.

• Her son did not meet the age test to be a
  qualifying child, but he met the requirements to
  be a qualifying relative.
• Her home was the main home for her and her
  qualifying relative for more than half the year.
• Taxpayer was entitled to the dependent exemption
  credit for her qualifying person.

50
Case Study u No. 5 continued

• The four qualifications to be a qualifying
  relative are
• Relationship Test
• Gross Income Test
• Support Test
• Not a Qualifying Child Test

51
Case Study u No. 5 continued

• The Determination
• Taxpayer qualifies because she met all of the
  tests.

52
Case Study u No. 6

• The taxpayer was married and lived with her
  spouse and her 17-year-old daughter until
  September 26. The taxpayers divorce was final on
  November 16. The taxpayer did not remarry or
  enter into a registered domestic partnership.
• The taxpayer paid all of the costs of keeping up
  the home for herself and her daughter, who lived
  with her from January 1 to December 15. The
  daughter had no income.

53
Case Study u No. 6 continued

• Although the taxpayer lived with her spouse
  during
• the last six months of the year
• She was unmarried and not an RDP as of December
  31.
• She paid more than half the cost of keeping up
  her home.
• Her home was the main home for her qualifying
  child for more than half the year.

54
Case Study u No. 6 continued

• To determine how many days the taxpayers home
  was the main home of the child, follow the
  guidelines below
• Count half the days when the taxpayer and the
  child lived together in the taxpayers home
  while the taxpayers ex-spouse/ex-RDP was also
  living there.
• January 1 to September 26 is 269 days. Divide 269
  by 2, the result is 134.5 days allowed for each
  parent.

55
Case Study u No. 6 continued

• 3. Then add all the days the taxpayer and the
  qualifying child lived together in the
  taxpayers home without the taxpayers spouse/RDP
  (ex-spouse/ex-RDP)
• September 27 to December 15 is 80 days.
• The taxpayers child lived with the taxpayer for
  214.5 days (134.5 80).

56
Case Study u No. 6 continued

• The Determination
• Taxpayer qualifies for head of household filing
  status because using the Tierney rule, her
  qualifying person lived with her for more than
  half the year

57
Case Study u No. 7

• The taxpayer is unmarried and not an RDP.
• The taxpayer claimed his girlfriends 12-year-old
  son as his qualifying person.
• His girlfriend and her son lived with the
  taxpayer for the entire year.
• The taxpayer paid all of the costs of keeping up
  the home.
• The son had no income.

58
Case Study u No. 7 continued

• Analysis
• The girlfriends son is not one of the relatives
  who, by law, can qualify a taxpayer for head of
  household filing status.
• He is not the taxpayers birth child, adopted
  child, stepchild, or eligible foster child.

59
Case Study u No. 7 continued

• The Determination
• The taxpayer does not qualify for the head of
  household filing status. He may be entitled to a
  Dependent Exemption Credit for his girlfriend and
  her child if all of the Dependent Exemption
  Credit tests are met.
• See FTB Publication 1540, definition for
  Dependent Exemption Credit for requirements to
  claim the credit.

60
Case Study u No. 8

• The taxpayer was married as of the last day of
  the year, but did not live with her spouse
  during the tax year.
• The taxpayers 22-year-old son lived with the
  taxpayer the entire year, was not a student, and
  had gross income of 8,500.
• The taxpayer paid all of the costs of maintaining
  her home.

61
Case Study u No. 8 continued

• Analysis
• A qualifying child must be under 19 years of age,
  or under 24 years of age if a full-time student,
  to meet the age test.
• A qualifying relative cannot earn more than the
  federal dependent exemption amount for the year
  in question.

62
Case Study u No. 8 continued

• The Determination
• The taxpayer does not qualify for the head of
  household filing status because her son does not
  meet the requirements to be either a qualifying
  child or a qualifying relative.

63
Contacts

• Head of Household Information
• Practitioners Hotline [phone]
• Taxpayer Service Center 800.852.5711

64
Contacts

• Franchise Tax Board Head of HouseholdAudit
  Program Contacts
• Rick Mitchell Section Manager 916.845.3421
• Alex Davoodi Unit Manager 916.845.6728
• Ruth Wagner Audit Group Manager 916.845.5378

65
Thank You