Chief Tax Officer, Jackson Hewitt Tax Service Inc.
Posted: 02/12/2014 1:55 pm EST Updated: 02/12/2014 8:59 pm EST
Most people think of Valentine’s Day as a time for romance and love, roses and Champagne — not a time to think about taxes. But if you have followed any of my pieces, you know that I think differently. Just like how your relationship status affects how you spend Valentine’s Day, it can impact your taxes. Under the U.S. tax law, for all individual tax returns in the United States, there are only five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualified Widow. Choosing the right one can help you in many ways, from simply lowering tax rates, making higher tax credits available, and other benefits which can put more money in your pocket. So make the most out of your tax situation — pick the correct and best Filing Status.
Before we can look at the filing status you have to determine your marital status. IRS doesn’t care about the quality of your marriage, or boyfriend/girlfriend, BFF or other relationship factors. They do care about the legal position of your marriage since this has a tremendous impact on your tax return. Same gender marriages are included as well, but more on that in a bit. Marital status for taxes is determined as of December 31. So, if you got married New Year’s Eve and are considered legally married under state law, not by your smartphone app wielding uncle (unless he is a minister), then you are considered married for the whole year. Conversely, if you got divorced December 31, you are considered single for the full year.
Did you just get married? According to the U.S. government, about 2 million people get married in the U.S. each year. First consideration: If you are married as of December 31, you have a choice of filing either Married Filing Jointly or Married Filing Separately. You can choose each year when it comes time to file your tax returns.
Generally, Married Filing Jointly is the best option when filing a tax return because it has the lowest overall taxes, allows two personal exemptions, even if only one spouse worked, and the highest standard deduction amount. In addition certain credits, such as the Earned Income Tax Credit and the American Opportunity Credit, are available at a higher income limit for Married Filing Jointly taxpayers.
If you chose to file a Married Filing Separately return you will only be paying taxes on your income and you can only claim deductions you paid for — your spouse will do the same. There are times when the Married Filing Separately filing status is more beneficial such as when one taxpayer has high medical or work-related expenses and their deduction is greater when they use only their own income. Beware, this filing status not only has the highest overall taxes, but the standard deduction amount can be zero if your spouse itemizes deductions and many of the more beneficial tax credits, such as Earned Income Tax Credit and the American Opportunity Credit will not be available when you file a separate tax return. Even with a higher tax bill, some taxpayers file separate returns due to other financial reasons. It can be the right choice for you. Before you opt to file — Married Filing Separately — be sure you understand the rules and implications or your preparer does.
If you are in a same gender marriage, you now have the same federal requirements for filing as either Married Filing Jointly or Married Filing Separately as other married taxpayers. This is a relatively new development, and not only a good thing going forward- there are options to go back and amend tax returns. If you think this may be beneficial to you, be sure to consult with your favorite tax professional.
Are you recently divorced? As of 2011, divorces were just shy of 900,000 per year. Single taxpayers include those who have never been married or were divorced or legally separated by December 31. Single taxpayers also have filing options and considerations. If you are single and you provide more than half of the household support for yourself and a dependent child, parent, or other relative, you may claim the Head of Household status. Yes, this special filing status is available for more than single parents, it is also available for single taxpayers with older relatives to care for. This filing status allows the second lowest overall taxes and standard deduction amount.
Tip for those that are newly married or newly divorced. If you changed your name, make sure you updated your account with the Social Security Administration. If your name and Social Security Number information on your tax return do not match exactly with what is in the Social Security Administration database, you can delay your tax return processing and delay your refund. Be sure to update your name on all government systems as soon as you have a life change — it will save you trouble later.
Are you still married, but separated from your spouse since June 30 and responsible for supporting a home for yourself and a dependent child? If so, you may be considered “unmarried” for tax purposes and be eligible for the Head of Household filing status. Taxpayers who are married are not eligible for Head of Household when they provide for other relatives, only when they have dependent children.
If you aren’t able to claim the Head of Household filing status and you aren’t married, your filing status is Single.
The final filing status, Qualifying Widow(er) is for taxpayers who were widowed during one of the previous two tax years and has a dependent child. This status allows the widowed taxpayer to use the Married Filing Jointly tax rates and standard deduction amount. Many of the tax benefits available when claiming this filing status have the same tax rates and standard deduction amounts as the Married Filing Jointly filing status.
Sound complicated? Well, in some cases it certainly can be. If you aren’t sure about your filing status, check with your local tax pro. It is a common misunderstanding that the IRS and other government agencies will coordinate your information if you change it in one place or even more. That is simply not the case. You will need to correctly select the appropriate filing status and if you have a name change make sure you notify the proper government offices. Failing to do so will cost you time and perhaps even money in your pocket.
Using the wrong filing status can lose you money, don’t lose money!