Changing from head of household to married filing jointly

December 13, 2018

Revenues

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Background

On their tax returns, people must indicate their filing status, which has implications for the amount of taxes they owe. Those who are not married generally file as single or as a head of household. Married people choose between filing jointly with their spouse and filing separately. In 2016, the most common filing status was single (48 percent), followed by married filing jointly (36 percent), head of household (14 percent), and married filing separately (2 percent).

A head of household receives several tax preferences that are not available to other unmarried individuals. Like other taxpayers, heads of households reduce their taxable income by claiming the standard deduction—which is a flat dollar amount—or by itemizing and deducting certain expenses, such as state and local taxes and charitable contributions. However, heads of households are eligible for a larger standard deduction ($18,000 in 2018) than other unmarried individuals (whose standard deduction is $12,000 in 2018).

Moreover, lower tax rates apply to a greater share of income earned by heads of households than other unmarried individuals. As specified by the tax code, different statutory tax rates apply to different portions of people's taxable ordinary income. (Taxable ordinary income is all income subject to the individual income tax other than most long-term capital gains and dividends, minus allowable adjustments, exemptions, and deductions.) For heads of households, compared with other unmarried taxpayers, a greater portion of income is taxed at the two lowest rates. Through the end of 2025, those rates are 10 percent and 12 percent. After 2025, they will be 10 percent and 15 percent. Other statutory rates are scheduled to rise as well.

Heads of households also qualify for some tax preferences at higher levels of income than those who file as single. For example, the saver's credit—which reduces taxes on up to 50 percent of contributions to certain retirement savings plans for low- and moderate-income taxpayers—begins to phase out at higher levels for heads of households than for single filers. After 2025, the personal and dependent exemptions (which were temporarily repealed by the 2017 tax act but will become effective again in 2026) and certain itemized deductions will also start to phase out at higher levels of income for heads of households than for single filers.

To qualify as a head of household, unmarried people must pay most of the costs of maintaining the household in which they have resided with a qualifying person for over half the year. The rules for claiming a qualifying person vary. In addition to meeting certain residency and relationship criteria, a child claimed as a qualifying person must be under the age of 19, under 24 and a full-time student, or permanently and totally disabled. Other dependent relatives, who also must meet residency and relationship criteria, must receive more than half their support from the head of household and have gross income below a specified amount ($4,150 in 2018).

In 2016, about 22 million unmarried taxpayers claimed head-of-household filing status on their tax returns. Of those taxpayers, nearly 19 million lived with a qualifying child.

Option

This option consists of two alternatives. The first alternative would eliminate the head-of-household filing status. The second would retain that status but limit it to taxpayers who pay more than half the costs of maintaining the household in which they have resided with a qualifying child under the age of 17.

Effects on the Budget

According to the staff of the Joint Committee on Taxation (JCT), eliminating the head-of-household filing status completely would raise $165 billion in revenues from 2019 through 2028. Limiting the head-of-household filing status to taxpayers with qualifying children under the age of 17 would raise $66 billion over that period, in JCT's estimation.

After 2025, the revenue estimates are lower, on net, than they would be if the amount of the standard deduction was not scheduled to decline. The lower standard deduction will decrease the tax benefits of filing as a head of household, causing fewer people to choose that filing status and thus reducing the revenue gains from repealing it or restricting eligibility for it. To some extent, that effect is offset by an increase in individual income tax rates in 2026, which would result in greater revenue gains after 2025; however, because most heads of households are already in relatively low rate brackets, those increases in tax rates have a smaller effect on the revenue estimates than the reduction in the standard deduction. (In 2016, 90 percent of filers claiming head-of-household status were subject to the two lowest statutory tax rates or did not owe any taxes on their ordinary income, and 82 percent claimed the standard deduction.)

There are several sources of uncertainty in the estimates. Those uncertain factors include the growth rate of personal income, the demographic characteristics of the U.S. population, and tax compliance. For example, the revenues raised by either alternative would probably be higher than estimated if the personal income of heads of households grew at a faster rate than the Congressional Budget Office currently projects, causing those taxpayers to be subject to higher statutory tax rates than anticipated. Revenues would also be higher than estimated if the number of single taxpayers reporting qualifying people in their home differed from current projections: The revenue gains from the option—especially the first alternative—would be higher, for example, if the number of single parents grew at a faster pace than is currently anticipated. Similarly, the gains in revenues would be lower if fewer taxpayers claimed the status than projected.

Other Effects

One argument in favor of the option is that the head-of-household filing status imposes marriage penalties. Marriage penalties occur when the combined amount of taxes paid by two unmarried people increases when they marry—most often when both spouses earn similar amounts of income. Thus, marriage penalties favor unmarried couples over married couples. For head-of-household filers, the standard deduction and the maximum amount of taxable income subject to the two lowest income tax rates are equal to more than half of those amounts for married couples filing joint returns. By contrast, the amounts for single filers are set at half the amounts for joint filers. Requiring all unmarried people to file as single would cause unmarried couples to be treated more similarly to married couples. Neither alternative, however, would eliminate marriage penalties entirely. For example, suppose that two unmarried people claimed head-of-household filing status, and both were eligible for the earned income tax credit (EITC)—a tax preference available only to taxpayers with income below a certain threshold. If those two people married, their combined income would make them ineligible for the EITC. In that case, under either alternative, they would both have to file as single when they were not married but would still incur a marriage penalty (through the loss of the EITC) when they wed. However, the size of that penalty would be smaller than if they had been able to file as heads of households before their marriage.

A closely related argument in favor of the option is that marriage penalties may create incentives for people to either remain unmarried or marry and misreport their filing status as a head of household. Although most research shows that marriage penalties have only a slight effect on people's decision to marry, studies of EITC compliance find that misreporting of marital status is one of the larger sources of erroneous claims. Eliminating or restricting the head-of-household filing status would reduce married people's incentives to misreport their filing status.

An argument for eliminating the head-of-household filing status, as the first alternative would, is that the criteria for eligibility are complicated: The rules are difficult for taxpayers to understand and difficult for the Internal Revenue Service to verify. That complexity probably also contributes to taxpayers' misreporting of their filing status on tax returns. By limiting the status to parents with children under the age of 17, the second alternative would help simplify the tax system by using the same age restrictions that apply to children claimed for the child tax credit. However, other complicated criteria would still be retained—in particular, the rules having to do with household maintenance and support, which require taxpayers to maintain extensive records of their expenses throughout the year.

An argument against eliminating or restricting the head-of-household filing status is that unmarried people living with a child or other dependent in their own home require more income to cover subsistence expenses than other unmarried people. The filing status is a way to provide assistance to low- and moderate-income taxpayers with dependent children or other relatives, though those benefits extend to higher-income taxpayers as well. Although the second alternative would preserve many taxpayers' ability to claim the head-of-household filing status, it would eliminate assistance for other taxpayers with similar needs—those whose dependents are age 17 or older.

Another argument against the option (especially the first alternative) concerns its effects on custodial parents who have existing child-support arrangements with the noncustodial parents of their children. Filing as a head of household provides at least one child-related tax benefit to a custodial parent who agrees to allow the noncustodial parent to claim the child tax credit and, after 2025, the dependent exemption. Some divorced parents may have negotiated child-support agreements that were based on the splitting of those child-related tax benefits. In those circumstances, the loss of the head-of-household filing status would make the custodial parent's after-tax income lower than anticipated when the support agreement was signed. If either of the alternatives was implemented, some affected parents might agree to adjust the support payments to reflect the change in tax law, but others might not have the same opportunity to renegotiate the terms of the support agreement. To reduce the burden on divorced parents, policymakers could retain the head-of-household filing status (either temporarily or permanently) for taxpayers with child-support agreements in place prior to enactment of the option.