When you’re filling out your tax forms, it seems like the easiest questions appear at the top. You have your name, social security number, address, and tax filing status.
The filing status seems simple, but the box you check can have big implications on your final tax bill. Tax deductions, tax credits, and your income tax rate can all change. That could raise your tax bill by thousands of dollars.
There’s a reason why choosing the wrong status is cited at one of the most common mistakes taxpayers make.
Read on to find out more about how a tax filing status can affect your taxes and how you can select the right one for your situation.
The Five Tax Statuses
Looking at your tax forms, you’ll notice that the IRS uses five separate statuses for filing taxes.
This tax status is for people who are not married, divorced, or legally separated.
Head of Household
Did you cover more than half of the expenses in your household and have a dependent or qualifying child? You may qualify as head of household if you’re unmarried or separated from your spouse for at least six months.
This tax status creates the most confusion because it depends on who is a dependent. For example, if you’re a single caregiver for a grandparent or grandchild, you may be able to claim Head of Household.
Married Filing Jointly
As a married person, you can opt to file your taxes jointly as a couple.
Married Filing Separately
Married couples could also choose this option to file taxes separately.
Qualifying Widow or Widower with a Dependent Child
This is a tax status that allows a widow or widower to keep the benefits of filing jointly for two years after the death of the spouse.
To qualify for this status, you have to have a dependent child and the year that you claim has to be within two years after the year of your spouse’s death.
If your spouse died in 2018, you can claim this status in the tax years 2019 and 2020.
Tax Filing Status and Deductions
Your tax filing status will affect both the standard deduction and itemized deductions. Thanks to the Tax Cuts and Jobs Act of 2017, the standard deduction doubled.
The intent behind that was to lower the number of people itemizing deductions. Depending on your tax status, it may make sense to take the standard deduction or to itemize.
For example, a married couple filing jointly can take a standard deduction of $24,400 for the 2019 tax year. If they file separately, they would each claim $12,200 as the standard deduction.
Your tax status can also impact the amount of itemized tax deductions you can take. For married couples filing separately, you may not be able to claim a $2500 student loan interest deduction.
Tax Filing Status and Income Tax Rate
The tax filing status will affect your income tax rate. Your income tax rate will increase as your income increases. The income thresholds change according to your tax filing status.
For example, if you’re a single person with a taxable income of $50,000 a year, your tax rate is 22%. Now if you file as head of household, with the same amount of taxable income, your tax rate is only 12%.
One common situation is that taxpayers transition from married filing jointly to filing as single because of a divorce. In that case, you’ll file as single, which means a different income bracket and standard deduction.
Tax Filing Status and Tax Credits
One of the most popular tax credits is the earned income tax credit. Your filing status, income, and the number of dependents can impact the amount you can claim in tax credits.
In some cases, you may not be able to claim or have limits against other tax credits such as the lifetime learning credit and the American opportunity credit.
Choosing Your Tax Status
You can’t all of the sudden decide to file as Married if you’re really a single person. You have to choose the tax filing status that you qualify for.
However, married couples have a choice as to how they file. The real decision happens when you’re deciding between married filing jointly or married filing separately. In 2016, about 5 million taxpayers opted to file married, filing separately.
On the other hand, 54 million couples decided to file jointly. When you look at the various deductions you can claim, it’s easy to understand why.
You want to select the status that you qualify for. If you happen to qualify for more than one tax status, you want to choose the status that will give you a lower tax liability.
That being said, the right filing status really depends on your unique situation. It’s always best to consult with a tax professional to make sure that you get it right.
Your Tax Filing Status Matters
Checking a small box on your tax forms seems so easy, but when it comes to your tax filing status, it’s all too easy to get it wrong.
Your filing status can have a significant impact on the tax credits you can claim, the deductions you can claim, and your income tax rate. Choosing the wrong status could leave you with a larger tax bill than expected.
Do you want to know how you can get your tax status right and pay the appropriate amount of taxes? Contact us today for a free consultation.