The right filing status will allow you to pay the least amount of US income tax. Whether you are single, married, or have dependents determines your filing status. Your filing status determines how much you can earn before paying higher taxes, and you can reduce your gross income so that you pay taxes only on the remainder.
There are five filing statuses offered by the IRS for your tax return:
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er)
How your filing status determines your standard deduction of taxable income:
The standard deduction for tax year 2020 depends on your status, and are as follows:
- Single: $12,400
- Married filing jointly: $24,800
- Married filing separately: $12,400
- Head of household: $18,650
- Qualifying widow(er): $24,800 – Qualifying widow(er)s can only claim the same standard deduction as married taxpayers filing jointly for two years after the death of their spouse.
As you can see, if you qualify as a head of household rather than single filer, you can reduce your taxable income for 2020 by $6,250.
Determining marital status for filing taxes:
For tax purposes, the date for determining your filing status is December 31, and whether you are married or single on that exact date.
You are considered married for tax purposes if:
- You’re legally married on the last day of the year (December 31) and living with your spouse.
- You’re separated from your spouse through an agreement rather than a court order.
You are not considered married for tax purposes if:
- You’re separated from your spouse by a court order.
Married filing jointly:
Married spouses can agree to file a joint return that combines both of your incomes and deductions. Both spouses must sign it.
The married filing jointly status provides more tax benefits than spouses filing separate tax returns. However, you are ‘jointly and severally liable’ for the accuracy of the return. You are agreeing to have individual responsibility, which essentially means that the IRS can collect the full amount of combined taxes due from you personally, even if you only earned a small fraction of the money that produced these taxes.
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Married filing separately:
Married spouses can choose to file their tax returns separately. However, taxpayers with married filing separately status receive the least beneficial tax treatment and won’t qualify for several credits or benefits. You will not qualify for the earned income tax credit or the American Opportunity education credit, and the child tax credit and child and dependent care credit will be negatively affected.
If married and filing separately, you will still need to coordinate your return with your spouse. If you have any children, you will need to organise who gets to claim them as dependents on their tax return. Both spouses need to take the standard deduction or itemize their deductions and ensure both returns ‘match’ on this.
Although filing jointly can lower taxes, filing separately can be useful in minimizing tax risks and separating liabilities.
There are also some other reasons as to why a married couple might want to file separately:
- One spouse does not want to be individually responsible for the combined taxes on the return.
- One spouse owes tax while the other would receive a refund.
- One spouse wants to file taxes but the other does not need to file.
- Concern that the joint return might not be accurate.
- Spouses that are separated but not yet divorced, wanting to keep their finances separate.
Qualifying widow(er) filing status:
Even without a dependent, you can file jointly or separately as a married taxpayer for the tax year in which your spouse died. If you have a dependent child, then you can still file as a qualifying widow(er) after the initial year of death, given that you remain unmarried.
Filing your taxes under this status will allow you to continue to benefit from the same standard deduction and tax rates as married filing jointly taxpayers.
You can only claim qualifying widow(er) status for two years if you remain unmarried, after which your filing status will change to single or head of household if you are still unmarried.
Single filing status:
If you are unmarried on the last day of the calendar year (December 31), then you’ll file for your taxes under single status. To be considered unmarried the following conditions must be met:
- You’ve never been married
- You’re divorced
- Your spouse has been deceased for more than two years and you haven’t remarried
- You’re separated from your spouse by a court order
You also need to have no dependents that could qualify you for the head of household or qualifying widow(er) status, as these statuses would be more beneficial.
Head of household filing status:
You must be considered unmarried on the last day of the tax year and have been looking after a dependent for more than six months of the year, to receive the head of household status.
Some married taxpayers can be considered unmarried in order to qualify for head of household status. If you and your spouse have strictly not lived together during the last six months of the tax year (not even one day after June 30), then you can qualify, provided you meet some additional requirements. Unintended time apart does not qualify – for example, if your spouse was living somewhere elsewhere for business.