Paying tax can be painful, but have you considered that your tax-filing status could make a big difference in your tax bill?
The amount you ultimately pay as tax is largely dependent on your tax-filing status, whether as a small business, a freelance worker or an individual.
The IRS allocates five official choices for individuals. What you might not be aware of is, there are requirements for each status. There are also specific exceptions and worksheets for making the appropriate filing choice.
Most people do not understand these details. And others find tax details rather baffling. Approaching taxation without understanding it may often have an unfavorable impact on your tax bill. Fortunately though, a tax professional is always available in your state and hometown to help out.
Kelly Phillips Erb, a tax analyst admits in her Forbes article that “I bake my own bread. I pickle my own vegetables. I make my kids’ Halloween costumes. I can code a little. But I do not do my own taxes.”
Picking the right status when filing is crucial. It will determine a number of crucial outcomes including whether you can take particular tax deductions or exemptions that could lower your ultimate tax bill.
There are even cases where your status can determine whether you have to file at all. Here are the five different categories.
This status applies to taxpayers who have never married, those that are unmarried and those who are divorced. You’ll legally be considered are considered single for the entire year if you were lawfully single at the close of the year.
Here too, the law considers you married for the whole year of taxation provided that you were married on the last day of the tax year.
As from 2013, married couples are not just persons of opposite sex that have come together on a matrimonial union. Same-sex marriages are recognized following a 2013 US Supreme Court ruling that annulled the section of the federal Defense of Marriage Act that defined marriage- for federal purposes- as a legitimate union between a man and woman.
For federal purposes in the United States of America, same-sex marriages are recognized and the persons involved can file their tax status jointly under this category. This includes filing in cases where the persons’ home state does not consent to such marriages as legal. But here again, a tax preparer will be invaluable in providing the most appropriate counsel depending on your state.
Both spouses who file jointly report their income on a single Form 1040. Both of the filers are liable for any tax due, or subsequent interest and penalty if any. This remains the case even in the event that only one of the two filers earned al the income.
This joint filing option has some tax credits that are not obtainable under the other filing statuses.
The US Internal Revenue Service law allows married couples to file their statuses separately. In this case, the couples separate out their income, exemptions and deductions and file two individual returns.
There are various cases where this approach to filing is advised despite the benefits that come with joint filing for married couples. An example is where a spouse had huge medical expenses. These costs have to exceed a given percentage of the filer's income for them to be deductible. This limit therefore becomes easily attainable where only the earnings of the eligible spouse are used.
Where a tax preparer is consulted, they lay out the options available for the couples and highlight the relative benefits of each alternative before a final status option can be decided upon. Eventually the filers are able to use the method that results in the lowest tax payment.
This is the status that applies to taxpayers who in the course of the tax year provided an amount exceeding half the cost of maintaining a home for a qualifying person and the filer who lived in that home for over six months.
These filers typically get a larger standard deduction amount compared to single filers. There are certain cases where married persons that have not lived with their partners may be eligible for this status.
You may file this status the year after your spouse died. This means that you are still eligible for the joint return status during the year that you lose your spouse.
There are a few conditions that apply for you to file as a qualifying widow or widower. Picking the right status for tax filing is never easy. The IRS website will time you for the process. If 15 minutes elapse without activity then your session will end automatically and you will be forced to start over the entire interview. That’s why it’s highly advisable to seek a tax professional to help.
Shannel Reed|
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