A recent IRS Tax Tip (below) gave me the idea of doing a four-part article since we’re now starting the filing season for Tax Year 2014. The IRS Tip covers some basic facts about choosing a Filing Status on your tax return. This got me thinking that a big-picture overview of the tax return may be helpful to people filing a return for the first time, or who’ve filed returns before but are still completely mystified about the process.
From the big-picture perspective, the income tax form can basically be divided into 4 parts: your Filing Status and Exemptions, your Income, your Deductions and other Adjustments to income, and your Credits. Your Filing Status determines your tax brackets, or what rate of tax you’ll pay on your income. Your Filing Status can also determine whether or not you’re eligible for certain credits and deductions. Your Income is fairly straight-forward, it’s all the income you received during the year, and it’s the starting point for determining how much money you’ll be taxed on. But there are some nuances and sources of confusion there. (Are gifts income? What about selling your old car?) I’ll cover the income basics in the second article.
In the third article, I’ll cover Deductions and Adjustments to income. These are items that can reduce how much of your income is considered taxable. After subtracting the Deductions and Adjustments from your Income, you’ll have a taxable income that is used to calculate your tax liability. And finally, the fourth article will cover Credits, which are direct reductions of the tax liability determined in the previous step. Hopefully, these four articles will help you get a general sense of the process of determining your tax liability, and maybe give you some ideas for how you can reduce it.
You can think of the process as a mathematical formula:
– Adjustment and Deductions
x Effective Tax Rate (determined by your Filing Status)
– Tax Credits and Payments
Your Tax Refund/Balance Due
This formula generalizes and leaves out some details. But if you’re mathematically-minded, it’s a reasonable approximation of the process.
The first part of the tax form is where you declare your Filing Status, which determines your tax rate. In general, the Filing Statuses go from better to worse in the following order: Married Filing Joint, Qualifying Widower, Head of Household, Single, then Married Filing Separate. There are some exceptions to this. For example, a married couple where one spouse has high medical expenses and the other spouse has high income might be better off filing Married Filing Separate than filing Jointly. And some couples with two high earners will find they’re better off staying legally Single and filing their own returns than getting married. But these are the exceptions to the rule.
It’s not as simple as just choosing a status, of course. In general (there’s that term again), your legal marital status on the last day of the year will determine whether you must file as Married (either Jointly or Separately). However, if you’re legally married to a same-sex partner, as many of my clients are acutely aware, the IRS is not allowed to recognize this marriage under federal law, regardless of the laws in the state where you live. On the other hand, if your legal spouse died during the year, you’re generally (that dreaded word again) still considered married on the last day of the year, and may file a joint return.
If you’re not recognized as married on the last day of the year, you must choose between Qualifying Widow(er), Head of Household, or Single. Qualifying Widow(er) is explained in fact #8 below. The narrow criteria make it the least common filing status, in my experience, but it can be very valuable for individuals who qualify.
Many people try for Head of Household status because it offers better tax rates than Single status, and the criteria are a little more broad. I won’t go into all the detail, but generally (if this were a drinking game based on “general”, you’d be tipsy by now) this requires you to support a dependent child living with you in a home in which you pay more than half the household costs. You might also be eligible if you have a parent who is dependent on you for financial support. The relationships that qualify you for Head of Household status are narrowly defined, so unfortunately having a deadbeat roommate, or a pet, will not allow you to qualify as Head of Household (unless the deadbeat roommate also happens to be a younger sibling). But if you’re not in a recognized marriage at the end of the year, and you don’t meet the criteria for either Qualifying Widow(er) or Head of Household, that leaves you with Single filing status. While not the most advantageous filing status, you can at least know that you have company…it’s the most popular filing status.
More from the IRS…
Eight Facts to Help Determine Your Correct Filing Status
Determining your filing status is one of the first steps to filing your federal income tax return. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) with Dependent Child. Your filing status is used to determine your filing requirements, standard deduction, eligibility for certain credits and deductions, and your correct tax.
Some people may qualify for more than one filing status. Here are eight facts about filing status that the IRS wants you to know so you can choose the best option for your situation.
1. Your marital status on the last day of the year determines your marital status for the entire year.
2. If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.
3. Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.
4. A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.
5. If your spouse died during the year and you did not remarry during 2011, usually you may still file a joint return with that spouse for the year of death.
6. A married couple may elect to file their returns separately. Each person’s filing status would generally be Married Filing Separately.
7. Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.
8. You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2012 or 2013, you have a dependent child, have not remarried and you meet certain other conditions.
There’s much more information about determining your filing status in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Publication 501 is available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant on the IRS website to determine your filing status. The ITA tool is a tax law resource on the IRS website that takes you through a series of questions and provides you with responses to tax law questions.
- IRS Publication 501, Exemptions, Standard Deduction, and Filing Information