Tax law distinguishes filing status because filing requirements, certain credits and above-the-line deductions, tax brackets, and the standard deduction depend on the filing status. Additionally, filing status determines the income threshold for which Social Security is taxed.
The main purpose of grouping taxpayers according to filing status is based on the presumption that, with the same income, single people can afford to pay a higher tax rate than those with children and, by allowing joint filing, it simplifies tax filing for married couples. There are 5 filing statuses:
- Head of Household
- Married Filing Jointly
- Married Filing Separately (MFS)
- Qualifying Widow(er) with Dependent Child
Filing status determines what standard deduction you may take and the boundaries of the income tax brackets for which your taxable income is determined. Because the 15% tax bracket depends on filing status, filing status also determines the tax rate on qualified dividends and capital gains, since if the taxpayer's tax bracket is 15% or less, then there is no tax. This tax rate also applies for the alternative minimum tax calculation.
State law determines single status but it is sometimes modified by federal law. Generally, single means unmarried, divorced or legally separated at the end of the tax year. Taxpayers filing as single or as married filing separately pay the highest tax rates.
Head of Household Status
The head of household status can be claimed if:
- you are unmarried, or are considered unmarried, by year-end,
- you paid more than ½ of the expenses for maintaining a household,
- you provided more than 50% support for a child, step-child, parent, or other qualifying relative, and who, except for a parent, lived with you for more than ½ year, and
- you were a United States citizen or resident for the entire year.
A qualifying child or relative must be legally related to you. Hence, boyfriends, girlfriends, or their children do not qualify you for head of household status even if they live with you and you provide more than ½ of their support.
You are considered unmarried if you are:
- single at the end of the tax year
- legally separated or divorced under a final court decree by the end of the tax year
- Note that the court decree must be final; provisional decrees for custody or support do not qualify as a legal separation.
- married but lived apart from your spouse during the last 6 months of the tax year
- married to a spouse who was a nonresident alien at any time during the tax year and you did not elect to file a joint return, reporting your joint worldwide income
In determining whether a child lives with you for more than ½ year, temporary absences, such as vacation or when the child stays with the other parent pursuant to a child custody agreement does not count. If a dependent dies before the end of the tax year, head of household status can still be claimed if the taxpayer provided more than ½ of the cost of maintaining the household before the dependent's death. A parent may be claimed as a dependent if you paid more than ½ of your parent's household expenses, even if the parent lives elsewhere.
Household expenses include utilities, repairs, mortgage interest, property taxes, rent, property insurance, domestic help, and food eaten within the home, but does not include the cost of clothing, education, medical expenses, life insurance, vacation costs, or any provided transportation. In other words, expenses specifically for an individual are not included: only expenses for the household are counted. Note, however, mortgage payments are not included as household expenses: only the mortgage interest. Moreover, you cannot count the value of your work around the home, since it is too easy to overstate its value.
Abandoned spouse rules allow a taxpayer who was abandoned by her spouse to file as head of household. Congress enacted these rules because otherwise the separated parent may be forced to use unfavorable tax rates if she must file married filing separately. To qualify as an abandoned spouse, you must satisfy the following requirements:
- you did not file a joint return
- you can claim the child, stepchild, or adopted child as a dependent
- your qualified dependent lived with you for more than ½ year
- you paid for more than ½ of household expenses during the last 6 months of the tax year
- your spouse did not live in the home during the last 6 months of the tax year
As a custodial parent, you can allow your ex-spouse to claim 1 or more of your dependents without giving up your head of household status, which may be advantageous if your ex-spouse is in a higher income tax bracket, but whose income is still below the phase-out limit for claiming dependent deductions or who is not subject to the alternative minimum tax, which is not reduced by exemptions. Who claims who can be changed from year to year, between you and your ex-spouse, but the noncustodial parent must file Form 8332 (Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent) for every year that he claims the exemption, and you must also sign the form.
If your spouse died recently, you may claim the qualifying widow(er) status if the following eligibility rules are met:
- You have a dependent child or stepchild. Note, however, that a foster child does not qualify under this provision of the tax code, but does qualify under the head-of-household status.
- Your spouse died within 2 years before the tax filing year.
- You were entitled to file a joint return with your spouse when you spouse died, regardless of whether you actually filed a joint return.
- You did not remarry by the end of the year for which you are filing a return.
- Except for temporary absences, such as being away for school, the child must have lived with you for the entire year. However, any qualifying child that was born or died during the year is considered to have lived with you for the entire year if the child lived with you during the year while he or she was alive.
- You provided more than half of the cost for the home for the year. Qualifying costs include the same household expenses used for determining head-of-household status:
- utility charges
- property insurance
- food eaten in the home
- property taxes
- mortgage interest expenses and
- other household expenses
Note that the qualifying widow(er) status differs from the head-of-household status by not counting foster children as qualified dependents under this provision and by requiring that the child must have lived with you for the entire year instead of just more than ½ year required for head-of-household status.
Married Filing Jointly or Separately
For spouses who live in a separate property state, a joint filing saves on taxes, if 1 spouse earns most of the household income. In community property states or if earnings are more equal, then taxes should be calculated for both a joint and separate filing to determine which yields the lowest taxes. Although the tax brackets for married filing separately are lower for incomes above $34,500, filing separately allows larger amounts of medical expenses, casualty losses and miscellaneous deductions to be deducted because these deductions must exceed a certain percentage of adjusted gross income, which would be lower for a spouse filing separately, especially if they both earned substantial sums of money. However, a disadvantage of filing separately is that both spouses must either itemize deductions or claim the standard deduction. Furthermore, MFS filers cannot claim either the deduction for college tuition expenses or the student loan interest deduction.
Certain tax benefits are only available to joint filers, especially if 1 spouse has little or no income. For instance, the working spouse can claim an IRA deduction for a nonworking spouse. Although a couple filing separately can claim an IRA contribution, the phaseout limit for a married person filing separately is $10,000 of modified adjusted gross income (MAGI), which, for most individuals, equals adjusted gross income. Since this is much less than what most people earn, filing separately effectively eliminates IRA deductions. For couples filing separately, the alternative minimum tax exemption and the right to deduct up to $3,000 of net capital losses against other income is ½ of the amount available to joint and other filers. Moreover, a spouse filing separately may not claim the
- credit for the elderly or the permanently disabled
- child and dependent care credit
- earned income credit
- adoption credit
- educational credits
- healthcare premium tax credit, unless the spouse is a victim of domestic violence
Additionally, 85% of Social Security benefits are includable in gross income for married couples who file separately, and disadvantageous premium surcharge rules for Medicare Part B and Part D premiums apply to spouses filing separately who live together at any time during the year.
Spouses can file a joint return only if:
- their tax years begin on the same date
- they are married and not legally separated on the last day of the tax year
- neither is a nonresident alien during the tax year, unless the nonresident alien is willing to be taxed on his worldwide income and supply all the necessary information to determine tax liability. If a nonresident alien earns a considerable income outside of the United States, then the couple should not file a joint return, since the nonresident's global income will be subject to United States tax.
A married-filing-separately return can be amended to a joint return by filing Form 1040X, Amended U. S. Individual Income Tax Return within 3 years of the original due date, without extensions, of the separate returns. However, the reverse is not true: separate returns cannot be amended to a joint return unless one spouse is deceased, in which case, the executor of the estate has one year from the due date plus extensions to change a joint filing to a separate filing.
Both spouses must sign a joint return. If a spouse is incapacitated and unable to sign, then the other spouse can sign for the disabled spouse by writing the disabled spouse's name followed by the words "by (signer's name), Husband or Wife, whichever the case may be, while supplying the following information:
- tax year for the filing
- type of form being filed
- reason why the other spouse cannot sign, and
- the other spouse has consented to the signing
If a spouse is in a combat zone or a qualified hazardous duty area, then the other spouse can sign the joint return for both by simply attaching a signed explanation to the return. If the other spouse is simply unavailable, such as being out of the country, then a spouse can sign for the absent spouse with a power of attorney from the absent spouse: IRS Form 2848, Power Of Attorney and Declaration of Representative may be used for the authorization.
Even if both spouses did not sign the joint return and the signing spouse did not act as an agent for the other spouse, the courts have ruled that such a joint filing will still be valid if:
- the other spouse's income was included in the return
- the information provided in the return conforms to the intention that it be a joint return
- the other spouse agreed that the filing spouse would handle the tax return, and
- the other spouse's failure to sign can be explained
On the joint return, both spouses have liability for unpaid taxes plus interest and penalties. Joint liability may be avoided under innocent spouse rules if the other spouse is largely responsible for understating tax. If a spouse filed a joint return but is divorced or separated from the other spouse on the joint filing, then the spouse could petition the IRS for separation of liability treatment. A separation of liability request will also be necessary if the correct tax was reported but not paid.
If you suspect that your spouse may be cheating, it may be prudent to file separately, since by doing so, joint-and-several liability for unpaid taxes plus interest and penalties on a joint return will be avoided.
Same-Sex Marriage Is Now Legal in All 50 States
On June 26, 2015, the U.S. Supreme Court has ruled that "same-sex couples have a constitutional right to marry", thereby legalizing same-sex marriage throughout the country. Henceforth, they will enjoy all the benefits (and drawbacks) of marriage. Note, however, that registered domestic partnerships, civil unions, or similar relationships that are still recognized under state law, but are not considered marriages under that law, will not be treated as marriages under federal tax law. IRS.gov: Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law
If a spouse dies, then, under certain conditions, the surviving spouse can still file a joint return for up to 2 years after the death of the spouse: Filing a Tax Return for a Deceased Taxpayer.
Nonresident Alien Spouse
If one spouse is a US citizen or resident alien by year-end, and the other spouse is a nonresident alien, then a joint return may be filed by choosing a special election to treat the nonresident alien spouse as a US resident, allowing both spouses to be taxed on their worldwide income. If the nonresident alien becomes a resident during the tax year, and the other spouse is a US citizen, then the special election must be made to file jointly. Records must be maintained on worldwide income that are available for review by the IRS.
The election is made by attaching a signed statement indicating that both spouses agree to be treated as US residents for the year. The election will apply to the tax year for which the return was filed and all later years until it is revoked by either spouse or it is suspended or terminated under IRS rules. The election is suspended if either spouse is not a US resident during the year; the suspension can be ended when either spouse becomes a US resident again. The election can be terminated by the IRS if:
- adequate records are not maintained on worldwide income
- if the spouses are legally separated under a decree of divorce or separate maintenance, or
- if 1 of the spouses dies, in which case, if the surviving spouse is a US citizen or resident and has a child, then the surviving spouse can file as a qualifying widow or widower, allowing a joint return to be filed for up to 2 years after the year of death.
If the election is terminated, then neither spouse can ever again file jointly as a couple.
Community Property States
In community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and Alaska, if community property status was selected — all the income earned by the spouses during their marriage is considered equally earned by each spouse. Spouses can also own separate property, which is property that they acquired before marriage or received as a gift or inheritance. In most community property states, the income produced by separate property is separate income of the spouse that owns the property. However, in Idaho, Louisiana, Texas, and Wisconsin, the income produced by separate property is considered community property and, thus, must be apportioned half-and-half to each spouse. Note that registered domestic partners in California, Nevada, and Washington are subject to federal income tax community property rules, so even though they are not legally married under state law, they must report half of the combined community property income on their separate returns.
Spouses that file separately must report ½ of their community income and claim ½ of their deductions on their separate returns. So if the wife earns $100,000 and the husband earns $50,000, then each spouse is considered to have earned $75,000, which must be reported on their tax returns. Additionally, Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States must be filed to show the allocation between community income and deductions and separate income and deductions.
After the death of a spouse, any income earned by a surviving spouse is treated as separate income, but any income earned from community property is still subject to the community property rules.
If the couple is separated, then community income rules may not apply, since it may be difficult for 1 spouse to know the income of the other. In these cases, income will be attributed to the one that actually earns it if the following conditions apply:
- there was no transfer of funds between the 2 spouses except for child support payments;
- the individuals lived apart for the entire year; and
- they did not file a joint return.
Innocent spouse rules apply to community property, where a spouse filing a separate return may be relieved of tax liability on community income attributed to the other spouse if the taxpayer could not have reasonably been expected to know about the community income earned by the other spouse. However, innocent spouse rules do not apply if the spouses lived apart for the entire tax year and file separate returns, since community property rules will not apply, so they will only be reporting their own income.
When a married couple moves from a common law state to a community property state, separate property remains separate property, but any subsequent earned income or property bought with such income is treated as community property. After moving from a community property state to a common-law state, community property continues to be treated as such until it is sold or reinvested, whence it is treated as separate property.
Self-Employment Tax Tip
Save self-employment taxes for a spouse if:
- you live in a community-property state,
- you and your spouse exclusively own an unincorporated business, and
- your combined income exceeds the social security contribution and benefit base per year.
Revenue Procedure 2002-69 allows you to file your joint return as a sole proprietorship, filing a single Schedule C for the business and paying the 12.4% Social Security tax on net profit up to the self-employment wage base (2017: $137,737) instead of having to pay the tax on double that amount, which will yield a savings of 12.4% of the net profit amount over that, but less than double the self-employment tax wage base, which is adjusted annually for inflation. For 2017, that would yield a maximum savings of 12.4% × $127,200 = $15,772.80 for any net profit ≥ $275,474 (= 2 × $137,737).
Note that, when calculating the maximum Social Security tax, the Social Security wage and benefit base is multiplied by 12.4%, which, in 2017, was $127,200. However, because the self-employed are permitted to deduct 7.65% of their wages, which is considered the employer portion of the tax, and the limit does not apply until after the employer portion is subtracted from their wages, their wages will not be subject to the maximum Social Security tax until their wages reach about 8% higher (what I call the self-employment tax wage base), which, in 2017, is about $137,737. For a complete explanation of this, see my article on Self-Employment Tax.
Below are some facts pertinent to earlier tax years:
- If the spouse of a qualifying widow(er) with a dependent child died in 2009, 2010, or 2011, and the surviving spouse did not remarry before 2012, then a joint return can be filed instead of an individual return, if the spouse is otherwise entitled to file jointly, even if she did not do so. A child, stepchild, or adopted child, but not a foster child who lived with the spouse during 2011 can be claimed, if the taxpayer paid over ½ the cost of maintaining household expenses. The child must have lived with the spouse for the entire year, not counting temporary absences. Note that this differs from head of household status in that a foster child is a qualifying dependent and that the residency requirement is only ½ year rather than a full year.
- In California, Nevada, and Washington, registered domestic partners were subject to federal income tax community property rules, but were not deemed married under federal law, so they could not file a joint return. Only legally married same-sex couples could file a joint return.
- In August, 2013, the IRS started to recognize all legally married same-sex couples for federal tax purposes regardless of whether the state of their present residence recognizes gay marriage or not. However, the couple must have been legally married in a state that allowed it. So if a couple was legally married in Massachusetts, then moved to Georgia, then the couple was treated, for federal tax purposes, as being legally married even though Georgia did not then recognize same-sex marriages. This ruling was enabled by the June Supreme Court decision to strike down the Defense of Marriage Act. Consequently, beginning with the 2013 tax year, all legally married same-sex couples were required to file either jointly or married filing separately; they could no longer file as if they were not married. This new ruling applies to all tax provisions where marriage is a factor, including filing status, IRA contributions, or claiming the standard deduction, personal and dependency exemptions, the earned income tax credit or the child tax credit.
- On June 26, 2015, the U.S. Supreme Court ruled that "same-sex couples have a constitutional right to marry", thereby legalizing same-sex marriage throughout the country. Henceforth, they will enjoy all the benefits (and drawbacks) of marriage.