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Unlock Tax Savings: A Guide To Choosing The Right Filing Status

Understanding Tax Filing Status

Tax season can be a stressful time for many of us, especially when it comes to figuring out which filing status to choose. It can seem like a daunting task, but with a little bit of knowledge, you can confidently file your taxes and save a significant amount of money.

The first step to understanding tax filing status is to know the different types available.

Types of Filing Status

The Internal Revenue Service (IRS) offers five types of filing statuses: single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child. The filing status you choose may depend on your marital status, family members, and other circumstances.

Marital Status

Your marital status as of December 31st is what determines your filing status for the entire tax year. If you got married or divorced in the current year, your marital status will be determined as of the last day of the year.

Married

Married couples can opt for filing jointly or separately. Filing jointly combines your income and deductions, potentially placing you in a lower tax bracket and giving you access to several deductions that would not be available for those filing single.

Filing separately may be beneficial in certain situations, such as high medical expenses, when one spouse is liable for a debt, or one spouse wants to protect their tax refund from another spouse’s debts.

Unmarried

Single filing status is for individuals who are not married, legally separated, or divorced. This category can include single parents, students, and young adults.

If you are unmarried but have dependents to support, you may be eligible for the head of household filing status.

Filing Options

If you are married, you have the option of filing jointly or separately. If your spouse died during the tax year, you can file as a qualifying widow(er) with a dependent child for the next two years.

Lastly, if you support a dependent and do not qualify as a qualifying widow(er), you may be able to file as the head of household.

Impact on Taxes

Your filing status can have a significant impact on the amount of taxes you owe. Here are some ways your status may affect your taxes:

Tax Bracket

Your filing status determines which tax bracket you fall into. The tax brackets range from 10% to 37%.

By choosing the right filing status, you can potentially lower your tax bracket and reduce the amount of taxes you owe.

Deductions

Some tax deductions are only available for certain filing statuses. For example, those who file as head of household have a higher standard deduction than those who are unmarried.

Standard Deduction

The standard deduction is a flat rate deduction (as of 2020, $12,400 for single filers, $24,800 for jointly filing married couples, and $18,650 for heads of household). Certain deductions may be itemized instead of a standard deduction if you have significant qualifying expenses.

However, this option is typically only preferred when itemizing deductions surpasses the standard deduction.

Choosing the Right Filing Status

Choosing the right filing status begins with gathering the information that determines your eligibility for each status. If you qualify for more than one status, you can choose the one that results in the least amount of tax.

If you’re not sure which filing status to choose, consult a tax professional or use the IRS’s interactive tax assistant tool on their website.

Single Filing Status

Single filing status is a common category for people who are unmarried, legally separated, or divorced. In terms of tax deductions and credits, there are a few things you should know.

Definition and Eligibility

Single filing status is for individuals who are not married, legally separated, or divorced. It is essential to note that if you’re divorced, your marital status is defined as of the last day of the calendar year.

Thus, if you were still married on December 31st, you can’t opt for a single filing status.

Standard Deduction

Single filers have a standard deduction of $12,400 for individuals who are not blind or over 65 years old. This number adjusts if the filer is older than age 65 or claims blindness.

As previously mentioned, itemizing deductions instead of using a standard deduction is only preferred if itemizing exceeds the standard deduction amount. If you’re unsure, a tax professional can guide you through which option is best for you.

In conclusion, choosing the right filing status can save you money, lower your tax bracket, and increase your standard tax deduction. Understanding the five different filing statuses and how they impact taxes is crucial to make the best decision.

The IRS offers several tools and resources to assist you in determining your filing status. With a little bit of effort and research, everyone can confidently navigate the tax season.

Head of Household Filing Status

Head of household filing status is for people who maintain a household for a qualified dependent, such as a child, elderly parent, or other relatives. This status is available to individuals that are unmarried or considered unmarried as of December 31st of the tax year.

Definition and Eligibility

To be considered a head of household, you must maintain a household for a qualifying individual for more than fifty percent of the year. You must also pay more than half of the household expenses, including rent, utilities, and groceries.

The qualifying individual must also live with you for more than half of the year and must be related to you. Examples of qualifying individuals may include your child, grandchild, parent, sibling, step-sibling, half-sibling, or any other relative who often lived with you and satisfies the dependency criteria.

Standard Deduction

The standard deduction for head of household filers for the tax year 2020 is $18,650, making it higher than the deduction that single filers receive. A filer is entitled to the standard deduction of head of household if he or she does not itemize their deductions.

Married Filing Jointly

The married filing jointly status is available to married couples who file their tax returns together. By combining incomes, some couples may potentially receive many more deductions and credits.

However, the Internal Revenue Service offers the married filing separately status that may benefit couples in some circumstances.

Definition and Eligibility

Married filing jointly status is open to married couples who file their tax returns together. This option allows married couples to combine their incomes and tax liabilities, along with listed deductions, to obtain a total tax bill.

However, couples should note they will share any taxes due on their joint return also.

Benefits of Filing Jointly

The married filing jointly status offers several benefits that couples can take advantage of, including:

Deductions

Married couples filing jointly can deduct certain expenses that are not available to those filing as single or head of household individually. These deductions may include mortgage interest, property taxes, state and local taxes, and business deductions.

Contributions to an Individual Retirement Account

Married couples may contribute to an individual retirement account (IRA) jointly. This helps dual earners maximize their retirement plan contributions and save money on taxes.

Regardless of which earner contributes to the IRA, the contributions are tax-deductible and considered individual contributions.

Standard Deduction

Married couples filing jointly will receive a standard deduction of $24,800, twice the amount than those filing single. In short, married couples receive more tax deductions, meaning they can potential save a significant amount of money.

The married filing jointly status is typically advantageous because of the added tax savings that come with shared deductions and credits in most situations. However, couples should evaluate their tax position and assess whether filing in another status such as married filing separately would be more advantageous.

Married Filing Jointly

Standard Deduction

The standard deduction for married filing jointly for the tax year 2020 is $24,800, the most significant standard deduction amount compared to all other filing statuses. The amount adjusts every year to account for inflation and other economic factors.

In conclusion, married couples have several options when it comes to filing their income taxes, such as filing jointly. Those who qualify and file jointly may enjoy additional deductions and credits and receive substantial savings on their federal tax bills.

Conversely, those who do not qualify for this status can still take advantage of federal tax deductions and credits by choosing the best filing option that aligns with their financial and income situations.

Married Filing Separately

Married filing separately status allows a married couple to file separate tax returns. This status is available to married couples who either cannot agree to file jointly or wish to keep their finances separate.

Even though you are married, you choose to file separately on an individual income tax return.

Definition and Eligibility

Married couples who agree not to file their tax returns jointly are eligible to file separately at any time. But, married couples that file separately can’t enjoy the same deductions and credits that couples filing jointly can.

However, each spouse maintains his or her individual tax liability and tax refund or payment obligation.

Another reason why some couples decide to file separately is to repay an outstanding tax debt from the current or previous years without acquiring new debt together.

When to file Separately

Couples might also consider filing separately if one spouse has excessive medical expenses during the tax year. Those who file separately may deduct medical expenses that total more than seven and a half percent of their adjusted gross income.

Additionally, couples with incomes near the top of a tax bracket may consider if filing separately could lower their overall tax bill.

Qualifying Widow(er) Filing Status

The qualifying widow(er) filing status is available to surviving spouses with dependent children who have lost their husband or wife. This status is a temporary option that widows or widowers can use after the death of a spouse.

Definition and Eligibility

To qualify for the qualifying widow(er) status, you must have been widowed within the previous two years and not remarried. You must have also maintained a household for a dependent child.

Lastly, you must have paid more than half of the household expenses during the tax year.

Standard Deduction

The standard deduction for qualifying widow(er) filing status is similar to the married filing jointly status. The standard deduction for the tax year 2020 is $24,800.

The amount adjusts for inflation every year and considers other economic factors.

The Bottom line

Filing taxes can be overwhelming, especially when you aren’t sure which filing status to choose. By understanding the unique qualities and criteria for each filing status available, you can make informed choices to maximize your federal tax savings.

Married filing separately status may be beneficial to couples with high medical bills or those who can’t agree on filing jointly. Additionally, the qualifying widow(er) status may provide temporary relief for families after the death of a loved one.

Finally, always consider hiring a tax professional or using the IRS tools and calculators, especially when assessing all of your options. Regardless of your situation, stay informed and prepared while making the most out of your earnings.

Choosing the Right Tax Filing Status

Your filing status determines your tax bracket and the amount of tax you owe. One of the essential decisions you make when filing your taxes is choosing the right filing status.

The following guidelines can help you in selecting the best filing status to reduce your tax liability.

Considering Multiple Options

Before deciding which filing status to use, review all of the options available carefully. Depending on your eligibility, you may qualify for more than one status.

If more than one status applies to your situation, select the status that works best for your tax situation. For example, if you are eligible for both married filing jointly and head of household status, you should determine which choice would provide you the greatest savings.

Reduction in Tax Liability

If you are looking to pay the lowest amount of tax or get a more significant tax refund, choose a filing status that will provide you with the best tax rate. In other words, this will allow you to utilize the deductions and credits that are applicable to you.

Here are some considerations to keep in mind when choosing a tax filing status:

Pay the Lowest Amount of Tax

If you want to pay the lowest amount of tax possible, choose a filing status that minimizes your adjusted gross income. Some filing statuses reduce your tax liability more effectively than other filing statuses.

For example, married filing jointly status allows you to combine the income of you and your partner, potentially placing your income in a lower tax bracket. This filing status may also provide access to many essential deductions and credits.

You can reduce your tax liability further by making contributions to your Individual Retirement Accounts (IRA).

Get a More Significant Tax Refund

If you want to get a larger tax refund, choose a filing status that allows you to claim all credits and deductions you are eligible for. The refund may represent the amount of money that is withholdings from your paychecks that was more than your actual tax liability due to overpaid taxes.

Successfully getting a larger tax refund depends on you being knowledgeable of the tax code with itemized deductions and credits available to you to maximize the refund.

Lower Tax Rate

To lower your tax rate, choose a filing status that reduces your taxable income. For example, if you qualify for head of household status, you are entitled to a higher standard deduction than if you filed as a single filer.

This increase in the standard deduction may reduce your taxable income and, in turn, lower your tax liability.

Other Considerations

Before making your decision, take the time to review the tax filing status and requirements. Filing your taxes can be confusing, and making the wrong decision can be costly.

If you are not comfortable choosing a tax filing status, seek the help of a tax professional. In conclusion, your tax filing status determines your tax bracket, tax liability, and tax refund.

Selecting the appropriate filing status for your situation is critical to reducing your tax liability and potentially increasing your tax refund. Consider multiple options and choose a filing status that minimizes your taxable income while providing access to the necessary credits and deductions.

The importance of choosing the right tax filing status cannot be overstated as it affects your tax bracket, deductions, credits, and tax liability. To make informed decisions, consider reviewing all of the filing status options and determining your eligibility for each.

Additionally, factors such as reducing tax liability, getting a larger refund, and lowering your tax rate should be considered when choosing a tax filing status. Seek the help of a tax professional if you are unsure, but remember that the right filing status can lead to significant savings on your federal taxes.

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