CHOOSING
AN INCOME TAX FILING STATUS
Selecting
a filing status is one of the first decisions you'll make when you fill out your federal
income tax return, so it's important to know the rules. And because you may have more than
one option, you need to know the advantages and disadvantages of each. Making the right
decision about your filing status can save money and prevent problems with the IRS down
the road.
The
five filing statuses and how they affect your tax liability
Your
filing status is especially important because it determines, in part, the tax rate applied
to your taxable income, the amount of your standard deduction, and the types of deductions
and credits available. By choosing the right filing status, you can minimize your taxes.
The
five filing statuses are single, married filing jointly, married filing separately, head
of household, and qualifying widow(er) with dependent child. There are six income tax
brackets. Your tax rate depends on your filing status and the amount of your taxable
income. For example, if you're single and your taxable income is more than $7,150 but not
more than $29,050 (in 2004), it's taxed at 15 percent. If you're a head of household
filer, though, your taxable income can climb to $38,900 and still be taxed at 15 percent.
So, it's clear that some filing statuses are more beneficial than others.
Although
you'll generally want to choose whichever filing status minimizes your taxes, other
considerations (such as a pending divorce) may also come into play.
You're
single if you're unmarried or legally separated from your spouse on the last day of the
year
This
one's pretty straightforward. And, depending on your circumstances, it may be your only
option. Your filing status is determined as of the last day of the tax year (December 31).
To use the single status, you must be unmarried or separated from your spouse by either
divorce or a written separate maintenance decree on the last day of the year.
Unfortunately, you jump into a higher tax bracket more quickly with the single status than
with some of the other filing statuses.
Married
filing jointly often results in tax savings for married couples
You
may file jointly if, on the last day of the tax year, you are:
·
Married
and living together as husband and wife
·
Married
and living apart, but not legally separated under a divorce decree or separate maintenance
agreement, or
·
Separated
under an interlocutory (i.e., not final) decree of divorce
Also,
you are considered married for the entire tax year for filing status purposes if your
spouse died during the tax year.
When
filing jointly, you and your spouse combine your income, exemptions, deductions, and
credits. Filing jointly generally offers the most tax savings for married couples. For one
thing, there are many credits that you can take if you file a joint return that you can't
take if you file married filing separately. These include the child and dependent care
credit, the adoption expense credit, the Hope credit, and the Lifetime Learning credit.
Still,
this filing status is not always the most advantageous. If your spouse owes certain debts
(including defaulted student loans and unpaid child support), the IRS may divert any
refund due on your joint tax return to the appropriate agency. To get your share of the
refund, you'll have to file an injured spouse claim and probably have to jump through
hoops. You can avoid the hassle by filing a separate return.
You
don't have to be separated to choose married filing separately
You
and your spouse can choose to file separately if you're married as of the last day of the
tax year. Here, you'd report only your own income and claim only your own deductions and
credits. Filing separately may be wise if you want to be responsible only for your own
tax. With a joint return, by comparison, each spouse is jointly and individually liable
for the full amount of the tax due. So, if your spouse skips town, you'd be left holding
the tax bag unless you qualified as an innocent spouse.
Filing
separately might also be the best tax move if one spouse has significant medical expenses
or miscellaneous itemized deductions. Your ability to take these deductions is tied in to
the level of your adjusted gross income (AGI). For example, medical expenses are
deductible only if they exceed 7.5 percent of AGI. By filing separately, the AGI for each
spouse is reduced. Keep in mind that if you and your spouse file separately and your
spouse itemizes deductions, you'll have to do the same.
Remember,
though, that you won't qualify for certain credits (such as the child and dependent care
tax credit) and can't take certain deductions if you file separately. For example, you
cannot deduct qualified education loan interest if you're married, unless you file a joint
return.
Head
of household status offers certain income tax advantages
Those
who qualify for the head of household filing status get special tax treatment. Not only
are the tax rates lower for head of household filers than for single filers and married
filing separately filers, but the standard deduction is larger as well. However, you'll
have to satisfy the following requirements:
·
Generally,
you should be unmarried at the end of the year (unless you live apart from your spouse and
meet certain tests)
·
You
must maintain a household for your child, dependent parent, or other qualifying dependent
relative
·
The
household must be your home and generally must also be the main home of a qualifying
relative for more than half of the year
·
You
must provide more than half the cost of maintaining the household
·
You
must be a U.S. citizen or resident alien for the entire tax year
Qualifying
widow(er) with dependent child offers the advantages of a joint return
You
may be able to select the qualifying widow(er) with dependent child filing status if your
spouse died recently. This status allows you to use joint tax rates and offers the highest
possible standard deduction, the one applicable to joint tax returns. To qualify, you must
satisfy all of the following conditions:
·
Your
spouse died either last tax year or the tax year before that
·
You
qualified to file a joint return with your spouse for the year he or she died
·
You
have not remarried before the end of the tax year
·
You
have a qualifying dependent child
·
You
provide over half the cost of keeping up a home for yourself and your qualifying child
As
you can see, choosing the correct filing status is not always easy. You might want to
speak with a professional tax preparer or consult IRS Publication 17 for more information.