Federal income tax is a progressive tax. This means that the more money earned by taxpayers, the more income taxes taxpayers pay. Taxpayers’ filing status is crucial to figuring out their ultimate tax liability.
Filing status is tied to taxpayers’ marital status. However, filing status can depend upon when the taxpayer married, when the taxpayer’s spouse died, or who else lives in the taxpayer’s home. A mistake in determining filing status can be expensive. There are five filing statuses:
- Single: A taxpayer’s marital status at the end of the year applies for the entire tax year. If a taxpayer is unmarried on Dec. 31, that taxpayer generally must file as a single person for that year.
- Married filing jointly: If a taxpayer is married at end of the year, the taxpayer can file a joint return with his or her spouse. The taxpayer may also file under the status of married filing separately. The latter status requires preparing two 1040s (one for each spouse). Note: the 2004 tax act extended relief for many married taxpayers. Through 2010, the basic standard deduction for joint returns is twice the standard deduction. In addition, the married filing jointly 10 to15 percent rate brackets will be twice those of single filers in respective brackets. This partially alleviates the marriage penalty but does not eliminate it.
- Married filing separately: Married people are not absolutely required to file a joint return with their spouses. Instead, they have the option to file separate income tax returns, with each return listing that spouse’s share of the couple’s income and deductions. This can be advantageous for some couples, though most find it the least advantageous way to file. And state laws also affect the bottom line. For example, in some states, a married couple’s income is deemed by law to be split 50/50; this is true regardless of who actually earns the income. In other words, the laws of a state may make it unattractive to file separate federal returns.
- Qualifying widow/widower: If taxpayers’ spouses die, they may be able to continue to file under the status of married filing jointly for up to two years after the spouse’s death. The taxpayer must remain single during those two years. Additionally, the taxpayer must pay over half the cost of maintaining a home for a dependent child. After the initial two years, such taxpayers may qualify to file as head of household.
- Head of household: Generally a taxpayer must be single to file as a head of household (HOH). A taxpayer who qualifies for this status is entitled to more favorable tax brackets and a more generous standard deduction. The Working Families Tax Relief Act of 2004 modified the definition of this status. The definition is detailed, but in general, a taxpayer may qualify for this filing status if the individual was unmarried on the last day of the year; file a separate return; furnished more than one-half the cost of maintaining the household during the tax year; and during the last six months of the tax year, did not have a spouse who was a member of the household. The only exception to the general rule that a taxpayer must be single to be a HOH is the “abandoned spouse rule.” A taxpayer may qualify for HOH if the individual was married at the end of the year and lived with the taxpayer’s child but apart from the person’s spouse for at least the last half of the year
In addition to federal income tax, most individuals must pay state income tax, and in some cases local income tax, depending on their place of residence. Besides the various income taxes, employers are re-quired to withhold 6.2 percent of their employees’ income for Social Security and another 1.45 percent for Medicare. Individuals with J, F, M and Q visas are exempt from Social Security and Medicare withholdings.