Definition
Head of Household and Single are two different filing statuses in U.S. tax law. “Single” applies to those who are unmarried, divorced, or legally separated, and they usually have higher tax rates. “Head of Household” applies to those who are unmarried, have a qualifying dependent, and pay more than half of the home’s upkeep, giving access to lower tax rates and increased standard deductions.
Key Takeaways
- The term “Head of Household” refers to a tax filing status for a single person who pays more than half of the costs for maintaining a home for themselves and a qualifying person. It provides a larger tax break than filing as a single individual.
- “Single” as a financial term refers to a filing status for a taxpayer who isn’t married, or is divorced or legally separated, and does not qualify for any other filing status like head of the household. The tax rates for this status are generally higher than those of a head of the household.
- Whether a person files taxes as a Single person or Head of Household significantly impacts the amount of taxes they owe. The head of household status typically carries more generous deductions and tax brackets that translate to lower tax liability.
Importance
The financial terms “Head of Household” and “Single” are important because they represent different tax filing statuses in the U.S.
tax system, which can significantly affect the amount of tax someone owes.
As a “Single” taxpayer, one is subject only to standard deductions and tax rates for individuals.
However, the “Head of Household” status is designed for single taxpayers who bear a high financial burden, such as supporting dependents or managing household expenses, often having more advantageous tax brackets and higher standard deductions.
Therefore, understanding these terms and choosing the correct status can lead to substantial tax savings.
Explanation
The terms Head of Household and Single primarily detail a person’s marital and familial standing, and crucially affect their status when filing tax returns. The United States’ Internal Revenue Service (IRS) uses these designations to determine the tax rates and exemptions applicable to an individual, influencing the amount of tax they owe each year.
Head of Household is a tax filing status specifically reserved for individuals who are unmarried and provide more than half of the financial support for at least one other person, who could be a child or other dependent. This status usually yields better tax benefits compared to Single filing status, which is utilized by unmarried individuals who do not qualify for any other filing status.
The Single filing status typically has higher tax rates and fewer tax benefits. Therefore, the selection between Head of Household and Single is vital as it directly affects one’s tax liability and potential refund.
Examples of Head of Household vs Single
Taxation: When filing income tax returns, the tax rates applied vary based on the filing status of the individual. For instance, a person filing as “single” may have different tax brackets, while a “head of household” may have lower tax rates, resulting in lower tax liabilities. The IRS determines this status based on certain criteria, including the fact that the person must be unmarried or considered unmarried on the last day of the year, has paid more than half the cost of keeping up a home for the year, and a qualifying person has lived with them for more than half the year.
Health Insurance: Consider two friends, Sam and Alex. Sam is single with no dependents, while Alex is a single parent with two dependent children and is thus the head of his household. When buying health insurance, Alex, as the head of household, might opt for a more comprehensive insurance plan because he has dependents relying on him. On the other hand, Sam may just get a basic insurance package as he only has himself to cover.
Household Expenses: Let’s take Jessica, a single woman living alone, and Mark, a single dad with two children. While Jessica might have fewer living costs and can budget more towards savings, traveling or investing, Mark, as the head of his household, must consider not just his needs but his children’s as well. This means budgeting for food, clothing, school supplies, and other necessities for multiple people. His larger budget devoted to living expenses might mean tighter constraints on spending in other areas.
FAQ: Head of Household vs Single
What is the difference between the ‘Head of Household’ and ‘Single’ filing status?
The ‘Head of Household’ and ‘Single’ are two different types of filing statuses in the U.S tax system. ‘Head of Household’ is a filing status for single or unmarried taxpayers who have maintained up more than half of the home for a qualifying person, like a child or parent. ‘Single’ is a filing status for individual taxpayers who are not married, nor qualify for any other filing status.
Who can file as ‘Head of Household’?
A taxpayer can file as ‘Head of Household’ if they are unmarried as of the end of the tax year, have paid more than half the cost of keeping up a home, and have a qualifying person who lived in their home for more than half the year (except for temporary absences).
What benefits does ‘Head of Household’ status provide over ‘Single’ status?
Filing as ‘Head of Household’ typically provides more tax benefits compared to filing as ‘Single’. These benefits may include a lower tax rate and a higher standard deduction.
Can I switch between ‘Head of Household’ and ‘Single’ status?
Yes, you can switch between ‘Head of Household’ and ‘Single’ status from year to year as your personal circumstances change. It is important to verify your eligibility for either status each year as the IRS has strict rules on qualifying criteria.
What is the impact on tax rate and deductions for these statuses?
The ‘Single’ filing status has four rate schedules, which are 10%, 12%, 24%, and 37%. The ‘Head of Household’ status has three rate schedules, which are 10%, 12%, and 24%. The standard deduction for ‘Single’ filers is $12,400 for 2020, while for ‘Head of Household’, the standard deduction is $18,650.
Related Entrepreneurship Terms
- Tax Brackets
- Filing Status
- Standard Deduction
- Dependent Exemptions
- Earned Income Tax Credit
Sources for More Information
- Internal Revenue Service (IRS): Provides official tax rules and definitions.
- H&R Block: A tax service company with helpful guides and articles about filing status.
- Investopedia: An expansive resource for various finance-related topics, including tax filing statuses.
- TurboTax by Intuit: Offers various articles and guides about tax management and filings.
