To adequately – and legally – decrease our tax liability we must understand various components of our tax return. Let's begin with filing status.
What is a filing status?
A taxpayer's filing status impacts which tax rate is used and which standard deductions apply when calculating federal income tax for the year. For the most part, five different statuses are considered. They are: single, head of household, married filing separately, married filing jointly and qualifying widow/widower with dependents.
Keep in mind that there may be exceptions to the rules that may be more beneficial to you. So, speaking with a tax professional is recommended. Let's review the categories to determine which status applies to your situation.
For those unmarried taxpayers with no dependents on the last day of the year, the single filing status is the category that may be most appropriate. If the taxpayer has a dependent, then the filing status of Head of Household may provide a better tax benefit.
Head of Household
If a single taxpayer has been providing care for a dependent for greater than six months, then the taxpayer may be eligible for the Head of Household (HOH) filing status. HOF filers are eligible for a higher standard deduction and lower tax rates than those filers that are "Single." Only certain closely related dependents will support a taxpayer being allowed to file as HOH.
There is an exception for a married person to file as HOH as well. A married taxpayer may be eligible to file HOH if the married couple did not live together for the last six months of the year and the taxpayer's home was the main home for their child for more than six months.Other tests may apply so ask your tax preparer.
The HOH status allows the taxpayer to take a higher deduction and/or claim earned income credit, if applicable, along with other credits. HOH may even allow the married taxpayer to take the standard deduction if the other spouse itemizes.
Married Filing Separately
When taxpayers are married, they have the option of filing jointly or separately. The taxpayer status with the least favorable tax treatment benefits is married filing separately (MFS). MFS provides the taxpayers with the ability to maintain separate tax liabilities. This benefit may be appealing if one spouse has or expects tax issues. So the ability to maintain separate tax liability may be worth the increased tax liability. Other reasons married couples may file separately include:
1) One spouse does not want to be responsible for the other party's tax bill.
2) One spouse owes taxes and the other expects to receive a refund.
3) One spouse believes the information on the joint return is false or inaccurate and does not want to agree to the accuracy of the information.
4) The couple is still married but separated. They have not divorced yet but want to begin to separate their tax filings.
Even if the parties are married filing separately, the spouses must agree on who carries the children as a dependent. Two individuals may not carry the same children on different returns. Spouses must communicate with each other to determine the treatment of the dependents. Additionally parties that are MFS must both agree to itemize or use the standard deduction.
Married Filing Jointly
Couples that are married may decide to file one tax return together or otherwise known as married filing jointly (MFJ). When filing jointly, the incomes and deductions for both parties are combined into one filing. Both parties must agree to file together, agree to the accuracy of the information on the tax return, and sign the document. MFJ provides the taxpayers with more benefits than MFS.
Qualifying Widow/Widower with Dependents
Remember, the filing status is determined on the last day of the year. When a taxpayer experiences the loss of spouse, IRS provides a special filing status to assist with the financial burden left by the deceased. The year that the spouse dies, the surviving spouse may choose to either file MFJ or MFS. However, for the two subsequent years, the surviving spouse may be eligible to file as a Qualifying Widow/Widower with a Dependent Child if they are maintaining a household for the child.