Tax Preparation Made Simple

Filing Status Determining the filing status on a tax return can, sometimes, be the most difficult part. In order to correctly choose the filing status, you must determine the marital status. The marital status of the taxpayer is determined on the last day of the tax year (December 31st for most taxpayers). The taxpayer is considered married if they and their spouse are: • Married and living together as husband and wife. • Living together as husband and wife in a state that recognizes common law marriages. • Married and living apart, but not legally separated under decree of separate maintenance or divorce. Note: If the spouse died during the year, they are considered married for the entire tax year. Single The taxpayer will file single if they are unmarried or legally separated under degree of divorce or separate maintenance and they do not qualify for any other filing status. Married Filing Joint If the taxpayer and spouse are considered married on December 31st of the tax year, they may file Married Filing Joint. This may be used even if only one spouse has income. Because of the higher standard deduction and the lower tax rates, this is usually the most beneficial way to file for most married couples. The taxpayer and spouse will be held jointly responsible for any taxes, penalties, and interest assessed on that return. Note: If the spouse died during the year, the taxpayer can file MFJ for that year. If the taxpayer remarries during the year, he/she may file MFJ with the new spouse. In this case, the deceased spouse’s filing status would be MFS. Married Filing Separate The taxpayer can choose Married Filing Separately if he or she is married and lives with or separately from his or her spouse. This can be chosen if the taxpayer or spouse wants to be responsible for only their own tax. Generally, this is the least beneficial way to file. However, there are some exceptions. A tax preparer should figure the tax both ways and choose the way that results in the lowest tax. A taxpayer filing Married Filing Separately can claim their spouse’s exemption on their tax return if the spouse had no income for the tax year and no one else can claim the spouse as a dependent. If the spouse had any income or can be claimed as a dependent on someone else’s tax return, the taxpayer may not claim them. This can be done without the spouse’s permission. Some of the disadvantages for choosing Married Filing Separate are: • Higher tax rate. • Lower exemption amount for Alternative Minimum tax • Cannot claim dependent care credit and can only exclude $2,500 dependent care benefits (as opposed to $5,000 for MFJ). • Cannot take earned income credit. • Cannot take any adoption credits. • Cannot take education credit or tuition and fees deduction. • Cannot deduct student loan interest. • Cannot exclude interest from U.S. savings bond used for higher education expense. • May be unable to claim credit for the elderly or disabled. • May be taxed on more Social Security income. • Have a lower income phase out range for child tax credit, and retirement savings contributions credit. • Have a capital loss limit of $1,500 (the limit is $3,000 for MFJ). • Lower standard deduction. • If the spouse itemizes, the taxpayer must itemize. • The First-time homebuyer credit is limited to $4,000 (instead of the full amount of $8,000). Note: In most cases, if the taxpayer is married on the last day of the tax year, they must file either MFJ or MFS. There is one exception: see married but considered unmarried under the Head of Household topic next. Head of Household The taxpayer may use the Head of Household filing status if: • They are unmarried or considered unmarried on the last day of the tax year, • They paid more than half the cost of keeping up a home for the year, and • A qualifying person lived with them for more than half the year. (A dependent parent does not have to live with them). See Table 2-1. Note: A qualifying person cannot qualify more than one taxpayer to use Head of Household filing status for the year. Married but Considered Unmarried for tax purposes. A taxpayer may be considered unmarried for tax purposes if: • They are filing separately from their spouse. • They paid more than half the cost of keeping up the home for the tax year. • The spouse did not live in the home during the last six months of the year. • The home is the main home for his child, stepchild, or eligible foster child for more than half the year and the child can be claimed as a dependent. *Exception: This test can be met if the only reason the taxpayer cannot claim the child as a dependent is if the noncustodial parent can claim the child under the rules for Children of Divorced or Separated Parents (discussed later in the chapter). Cost of Keeping up a Home Costs included in keeping up a home are rent, mortgage interest, utilities, upkeep, repairs, real estate taxes, food eaten in the home, etc. If the taxpayer receives any assistance, this must be included in the total cost, but not in the amount paid by taxpayer. Do not include personal costs such as clothing, medical, expenses, transportation, etc., in the cost of keeping up the home. See worksheet (Illustration 2-1).