Choose the Right Filing Status and Save Money

Like so much else about taxes, choosing your filing status is not always simple. You may be eligible for more than one filing status, so learn the rules to choose the status that saves you the most taxes.

Take Karen, a single mother earning $50,000, with one child, aged 10. In the year her husband died, Karen filed married joint, and her federal tax liability was $3,785. (She took the standard deduction.) The next two years, Karen filed as a qualifying widow and her tax bill rose to $4,280. Now Karen is no longer eligible for qualifying widow and files as head of household. Her bill: $4,892.

Here's a summary of the status rules.

You are married

If you are married on the last day of the tax year (December 31), you are generally considered married by the IRS. There are some exceptions: If your spouse died during the year, you are eligible to file jointly for that year; if you lived apart from your spouse during the last six months of the year and satisfy other conditions, you may file as head of household (see Head of Household, following).

As a married person, you can choose to file jointly with your spouse or separately. In general, you pay less if you file jointly, but in some instances choosing married-filing-separately status might be better:

If you don't trust your spouse or don't have access to his tax information, consider filing separately. You are responsible for the accuracy of the full return if you file jointly, as well as all the taxes shown on that return; filing separately gets you off the hook for his part.

If one spouse has high medical or unreimbursed business expenses, you may be able to deduct a higher percentage of them if you file separately. But you cannot try to take advantage of this rule by loading up deductions on one spouse's return and having the other spouse take the standard deduction. If one spouse itemizes deductions, both have to.

In some states, such as Ohio, if you both work, you usually save by filing separately. Remember, though, if you file separate state returns, you also have to file separate federal returns, so make sure extra taxes on the federal side don't offset your savings on state taxes.

The downside of filing separately? You lose benefits available only to joint filers, such as the Hope and Lifetime Learning credits, the deduction for student loan interest, the earned income credit and the savings bond interest exclusion. Many benefits, such as the standard deduction, are cut in half for each spouse if you file separately.

In addition, you cannot contribute to a Roth IRA or convert a traditional IRA to a Roth IRA if you file separately. The benefits of traditional IRAs are severely reduced as well.

How do you choose? The best way is to run your taxes both ways and pick the winner. That's easy if you use tax software such as Quicken's TurboTax but is time consuming if you're just using a pencil and paper. If someone else prepares your taxes, ask your preparer to run your return under both scenarios.

You are single

Single people have three filing choices: qualified widow(er), head of household or single filer. Of them, qualified widow status has the most favorable tax rates and head of household filing status is second. In general, you should file as a single only if you don't qualify for widow or head of household status.

Qualifying Widow
If your spouse dies, you may file as married for that year. In the following two years, you may file as a qualifying widow if:
You were entitled to file jointly in the year your spouse died.
You did not remarry during the year.
You paid more than half the cost of keeping up your home.
Your home was the main home for the full year for a dependent child.

After two years of filing as a qualifying widow, you may file as head of household if you meet the requirements outlined below.

Head of Household
This is the trickiest status to determine because it has the most rules. You are eligible if:
You are not married at the end of the year. (You can be considered unmarried if you are legally separated or if your spouse did not live with you for the last six months of the year.)
You paid more than half the cost of keeping up your home.
Your home was the main home for your child, a foster child or another dependent relative.
You are a citizen of the United States or resident for the entire year.

But that is not the full story; there are exceptions. For example, you can file as head of household even if your home wasn't the main home for your parent, as long as you paid more than half the cost of keeping up your parent's home, or more than half your parent's nursing home costs. Your parent must qualify as your dependent.

In some cases, you can file as head of household even though you don't claim any dependents on your tax return. If you are divorced and are the custodial parent, you can file as head of household even if your ex-spouse claims the exemption for your child, assuming you meet the requirements listed above.

Sometimes divorced parents will alternate years they claim exemptions for their children. As long as you are the custodial parent and you meet the other requirements, you can claim head of household, even in those years when you don't claim the child exemption. Be careful, though. Both parents cannot claim head of household status for the same child, even if you split custody.

For a complete explanation, refer to IRS Publication 501 (Exemptions, Deductions and Filing Information).

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