March 10, 2015

According to the Pew Research Center, 74% of online adults use social networking sites. A common feature of these sites is the ability to publish one’s current “relationship status.” Facebook, for example, has ten possible relationship options including “married,” “single,” and probably applicable to all of us at some time: “it’s complicated.”

Although many people opt out of these personal declarations, taxpayers are required to choose an appropriate filing status on their Federal Income Tax Returns each year. And, similar to Facebook, choosing a filing status can be complicated.

The following is a brief discussion of the different filing statuses and how they may apply to you.

singleFiling Single

A person may file “single” if the taxpayer is unmarried or legally separated on the last day of the tax year.

The tax code is not kind to taxpayers who file single. For example, individuals who file single have a comparatively small standard deduction, and their income is taxed quicker and at higher tax brackets. Also, for deductions and credits with phase-out features (such as student loan interest deduction), these phase-outs take effect at the lowest levels of income.

Despite the bleak tax terrain, a taxpayer who files single does have access to numerous deductions and credits, such as tuition and fees deduction and the earned income credit, which might otherwise be unavailable if he or she is married but files separately.

For taxpayers who are married, but separated, there may be the option to file single. However, this exception applies only where the taxpayer is legally separated and the couple has lived separately for the last six months of year.

Head of Householdhead of household

A person may file “Head of Household” if the following requirements are met:

  1. A taxpayer is considered unmarried on the last day of the tax year,
  2. The taxpayer pays more than half of the home expenses, and
  3. The taxpayer’s home was the primary residence of a “qualifying child” or a “qualifying relative.”

Taxpayers who file as head of household have a definitive tax advantage over taxpayers who file as single. Not only is the standard deduction higher, but the tax brackets accelerate at a slower rate, not to mention the increased number of exemptions, depending on the household size.

Similar to the exception for filing single, the head of household status also has a few caveats. For example, a married taxpayer may file head of household if the criteria above is met, so long as the couple was separated for the last six months of the year. Unlike filing as single, this does not require a “legal” or formal separation.

Also, for unmarried taxpayers who jointly support a dependent child, the head of household status may be a way for both parents to share tax benefits associated with the child. This happens when a custodial parent agrees to “release the exemption” by completing Form 8332 and having the non-custodial parent file this form along with his/her return. Although the custodial parent releases the exemption, he/she may still file Head of Household and gain other tax benefits from claiming the child.

Married Filing Jointly married

A taxpayer may file jointly if he/she has:

  1. Married and lived with his/her spouse throughout the tax year, or
  2. Married and not lived with his/her spouse, but has not been divorced or had a legal separation agreement.

In most circumstances, a married taxpayer who files jointly will enjoy a lower tax liability than with any other category. This is because the tax brackets accelerate slower, many tax benefits are doubled (such as the standard deduction or the primary exclusion for sale of a principle residence), and phase outs of certain tax benefits occur at much higher levels of income. Filing jointly also does not restrict access to credits and deductions that might be disallowed if filing separately.

Joint filers should realize, however, that in the event of an audit or underpayment of estimated taxes by one spouse, both signers will be fully responsible for correcting any issues with the return or deficiencies in taxes paid.

Married Filing Separatelyseparate

A taxpayer who is entitled to file married filing jointly, also has the option of filing “married filing separately”. There is a long list of disadvantages for filing separately, including the disallowance of numerous tax credits and deductions, as well as disadvantageous changes in how certain types of income are taxed, such as social security benefits. There are, however, some very important reasons why you may consider filing separately:

Separate liabilities – If either you or your spouse plans to file an aggressive tax return or if you anticipate an unpaid tax liability, filing separately can protect the other spouse from being jointly liable. Filing separately can also protect the refund of a non-liable spouse if the other taxpayer has prior debt for which their tax refund may be seized. In either situation, filing separately protects a married taxpayer from potential liabilities incurred by their spouse.

Preferential Tax Treatment – In some situations, filing separately will actually result in a lower individual tax liability. For example, if significant medical expenses are incurred during the year, the 10% AGI limit with the joint income may be too high to claim any benefit. However, by filing separately, the 10% AGI threshold could be much lower, allowing the taxpayer to deduct more of the medical expenses when filing separately. It is important to note however, that if one spouse files separately, the other spouse is also required to file separately. Therefore, taxpayers should review their separate returns together and compare those results to a joint return to determine the net benefit.

widowerQualifying Widow(er)

A taxpayer will qualify as a “qualifying widow(er)” if:

  1. The taxpayer’s spouse died in 2012 or 2013
  2. The taxpayer did not remarry before Jan 1, 2015
  3. The taxpayer paid more than half the costs of maintaining the home
  4. The home was the primary home for a dependent child during the tax year

Generally, in the year the taxpayer’s spouse has died, the taxpayer can file a joint return with the deceased spouse. The tax benefits of filing jointly is carried forward two additional years with the qualifying widow filing status, which provides greater tax benefits than filing as head of household. Effectively, the qualifying widow status allows the surviving spouse the same standard deduction and tax bracket as a joint-filer. This status, however, is only available to surviving spouses who have a dependent child in the household.

In conclusion, a taxpayer’s life and “status” may change from year to year, often making it a complicated process when trying to file their tax returns. While updating your filing status with the IRS may seem about as daunting as choosing your relationship status on social media sites, being aware of how the IRS defines each filing status will make that decision much easier and ultimately more beneficial for you.