Love, marriage…and taxes. While taxes aren’t the most romantic topic, it’s important to know that married couples are treated differently when it comes to how they file. This Valentine’s Day, I want to explain the importance of your tax filing status. Tantalizing, I know! Yet, this is a decision we all must make, and it’s the first step to make sure you file your taxes correctly, which also corresponds with how much (or how little) you have to pay.
There are 5 filing statuses to choose from: single, married filing jointly, married filing separately, head of household and qualifying widow(er) with dependent child. If more than one apply to you, you are allowed to choose the one that gives you the most benefit. Also, remember, the last day of the calendar year dictates your filing status. So, even if you were single for most of the year, your status on that last day is what counts.
This is the default filing status. If you’re not married and don’t have kids, this is most likely your filing status.
Married Filing Jointly
If you are married, this is the most common way to file. You can use this status even if one spouse doesn’t have income during the tax year. Under this filing method, you are responsible for any tax your spouse owes. If you don’t think they are being honest with you and the IRS, you may want to consider filing separately.
Married Filing Separately
Depending on the tax credits and deductions you and your spouse qualify for, this might be an effective filing status. For example, you might have a student loan interest deduction that is substantial. If you choose this filing status then both spouses must both itemize or both use the standard deduction. If you are married, it is recommended that you calculate your taxes according to both filing statuses in order to determine the status that is most beneficial. Generally, married filing separately will be more expensive.
Head of Household
To qualify for this status you have to be single, pay for the costs of maintaining a home and have a qualifying person live with you. Depending on your circumstances it can also apply to married people who live apart. If you qualify for this status, it will generally be of benefit to you.
Qualifying Widow(er) with Dependent Child
This filing status only applies to people whose spouses have recently died. As long as you don’t remarry, you can file using this status for two years after your spouse died.
Perhaps you’ve heard of the “marriage penalty.” It’s true. Because we have a progressive tax system in which the last dollar earned is taxed at a higher rate, some couples who file jointly pay more in taxes than they did when they were single. Although it’s important to understand the implication of marriage on your taxes and other aspects of your finances, don’t let taxes dictate when you do or don’t get married. They are secondary to a much larger decision!
More information on filing status can be found in this comprehensive publication on the IRS website. Please remember that everyone’s tax situation is a little different. If you think some of the ideas in this post apply to you, be sure to reach out to a qualified tax professional so you can maximize your tax savings in order to SaveUp!
This post was written by SaveUp’s personal finance contributing writer, Catherine Hawley, CFP®.
Image source: Yahoo Finance UK