What Filing Status Might Lower Our Taxes the Most?

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What Filing Status Might Lower Our Taxes the Most?

Which filing status we choose could have rather significant implications on the taxes we pay. The US system – unlike its counterparts in other parts of the world – has put into place five separate filing statuses.

Filing status is important in claiming certain deductions and credits.

CAVEATS

1. Some people may qualify for various filing statuses. Selecting the most effective and less tax costly status often boils down to running the numbers for each status. However, there are some guidelines that might be of assistance in selecting the less tax costly filing status.

2. The tax system is full of intricacies and minutiae. As such, you are highly advised to seek competent legal counsel.

SEPARATE FILING STATUSES

There are five SEPARATE tax filing statuses. Each filing status has its own effective rates.

  • Single
  • Married Filing Jointly
  • Married Filing Separately
  • Qualifying Widow(er)
  • Head of Household

1. SINGLES

Generally, single filers can take effective advantage of the relative benefits of our tax systems in rate schedules and deductions. For instance:

  • In income brackets above 25% and generally Alternative Minimum Tax, the allowed income for singles is usually MORE than HALF what marred couples filing jointly receive.
  • Single filers like couples filing jointly can take advantage of a $3,000 tax deduction on capital losses from their ordinary income.
  • Charitable deductions also, generally, favor single filers.
  • If in 2009, two single filers each earned $180,000 and decided to file jointly for 2009, they might have to incur at least $7,000 in added tax.

2. MARRIED COUPLES FILING JOINTLY

Definition of Married

Married applies only to the LEGAL union between a man and a woman. However, in CA, SOME domestic partners are also allowed to file a joint STATE return.

  • If you and your spouse are married for THE WHOLE YEAR, you and your spouse could file a joint return or separate return.
  • Generally, you are legally married if you live separately but not LEGALLY SEPARATED under a divorce decree or separate maintenance decree.

Time of Marital Status

Marital status is determined as of December 31. As such, engaged couples might want to run the numbers before setting a wedding date.

Definition of Unmarried

You are unmarried for the whole year, if:

  • In the last year of the year, you are LEGALLY unmarried or LEGALLY separated under a divorce or separate maintenance decree.

3. MARRIED COUPLES FILING SEPARATELY

  • Married couples filing separately, counter-intuitively, are not considered single filers.
  • Filing separately, generally, splits the value of joint tax benefits down the middle.
  • Generally, filing separately causes a net loss compared to filing jointly. The reason is filing separately prevents taxpayers from claiming lots of deductions or credits available to married couples filing jointly.
  • If one spouse filing separately itemizes, the other spouse MUST itemize as well.

Why Filing Separately Might Make Sense, Sometimes?

  • If one spouse who has lots of medical expenses, or a casualty loss on a property that is not jointly owned, filing separately may be more beneficial.
  • If one spouse believes the other spouse is not forthcoming with the IRS, filing separately makes sense.

4. HEAD OF HOUSEHOLD

To be considered the head of household, taxpayer MUST:

  1. Be single.
  2. Provide HALF of someone else’s support (Dependent). And,
  3. The Dependent MUST live with the taxpayer at least OVER half the year unless the Dependent is your parent.

Who is Dependent?

  • Your Child.
  • Your Parents. Or,
  • Somebody else.

The benefit of Filing As Head of Household

The allowed income per bracket for those filing as head of household is HIGHER than those filing single or jointly.

5. QUALIFYING WIDOW(ER)

To be considered a qualifying widow(er), ALL of the following requirements MUST be met:

  • Those who do not remarry after their spouse passed away in one of the two tax years, before the current tax year. AND,
  • The taxpayer MUST SUPPORT a child, stepchild or an adopted child for the WHOLE YEAR.

A qualifying widow(er) receives the most generous income tax bracket of all.

 

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