Tax Filing Status - What it Means

Hi everyone, and welcome back to Melissa Making Cents!

As a CERTIFIED FINANCIAL PLANNER™ and financial advisor representative, I talk with people every day about taxes. The season is no longer approaching; it's here! So, it's time to start readying up, buckling down, and doing your taxes (or having a tax preparer do them for you). Either way, it's essential to get and stay up to date with your taxes and understand what you're doing. Though it's not my specialty, I've learned so much about taxes, tax filing, and what people have questions about when it comes to doing their taxes. And because of that, I've decided to take the opportunity this tax season to answer some of the more common questions that people have about and surround the filing process!

Next week, I have a blog post about the differences and similarities between tax credits and tax deductions! I highly recommend checking this article out, as the knowledge in it could save you quite a bit of money when it's time to file! Not only can you claim both tax credits and tax deductions, but multiple types of each can make a big difference in the money you owe or get back from the government. This week, however, we're going to be talking about one of the most fundamental steps of doing your taxes – tax status.

The Five Statuses Intro

Now obviously, the first step of talking about tax statuses is defining what they are. Tax status is also called a filing status. This is something you're familiar with, even if you don't know it yet. Tax statuses are one of the first things you do on your taxes when you choose to file as single, married/joint, married/separate, head of household, or a qualifying widower. These are the five essential categories or statuses you may choose from when filing your tax returns.

Of these categories (single, married/joint, married separate, head of household, and widow(er) with children), the IRS says that each of us tightly fits into one category. What's important to note is that each category is closely tied to a few things: marital status, children, and dependents. We'll get into this more later; however, for most people, taking those three things into account is just about enough to figure out which status they fall under. Of course, life is a complex thing. All sorts of situations arise  that further complicate the IRS's nice five-status system. Luckily, the number of people walking around the USA and filing taxes is so vast that someone somewhere has likely had the same or similar situation that you're in!

What Does a Status Do?

Now that we've talked about what a tax status is, it's essential to discuss what they do. According to Investopedia, "The filing status is important because an individual's tax bracket (and, therefore, the amount they must pay) is determined by marital status, the number of dependents, occupation, and several other factors. You must file your status honestly, or it will be considered fraudulent, and penalties will be assessed." One of the most important things that tax statuses do is ensure that you're paying the correct percentage of your income in federal taxes. Not only does this help the government and IRS ensure that you're paying enough, but it also ensures you that you aren't paying too much.

While the classification system of tax statuses may seem trivial or unimportant – it isn't. It's critical that you decide upon the correct status that applies to you and file under it. If you don't, there could be severe tax penalties and consequences down the road. Making sure that you're filing correctly also protects you from paying more than what is owed in taxes, as I talked briefly about earlier. For example, if you have children, but you simply file as single – you won't get some of the tax credits associated with having children (which has recently increased drastically). There is also the issue of continuity to be considered. When it comes to anything electronic, a simple, innocent error can come back to haunt you over and over again. For example – if you input the wrong phone number by one digit into your multifactor authentication settings on Facebook, for example, you may have just signed away access to your account forever. When it comes to auditing, the IRS doesn't play around. An innocent error, like choosing the wrong tax status, could have both serious and annoying consequences to your tax profile for years to come.

The Five Filing Statuses in Depth

Now that we've talked about what tax statuses are and what they affect, it's finally time for us to lay it all out there and talk a bit about each tax filing status in a bit more depth. Under each specific tax filing status, we will cover the requirements and exclusions for filing under each classification, the benefits each status brings to the table, and some possible negative consequences of filing under specific statuses. We'll also delve into the differences between filing married/joint and married/separate.

-       Single

The single status is perhaps the most accessible place to start when discussing tax statuses. You must not be married and not qualify for another tax filing status to file under single. Essentially, this is the only requirement. It makes it relatively easy to decide whether you fit into this status classification. If you've never been married, have never had kids or dependents, and aren't dependent on someone else's taxes, you can safely assume that this is your tax filing status.

Unfortunately, as with most things that have to do with filing taxes, it's not always that simple and straightforward. In fact, it can be a little bit tricky to decide how to file if you've been married in the past or if you're recently divorced. If you divorced before the last day of the year or have received an annulment, the IRS will recognize you as single for the coming tax filing season. However, if you're divorce was finalized at any point before the last of the year, you'll be on the hook for filing as married for the coming tax season.

According to NerdWallet, "The IRS can make you use the "married filing jointly" or "married filing separately" tax filing status if you get a divorce just so you can file single and then remarry your ex in the next tax year." Unfortunately, this "trick" not only won't work but it's actually considered tax fraud. Moreover, it can land you in a load of trouble. So in this humble financial planner's opinion, do yourself a favor and don't even try.

One great thing about filing as single for tax season is that you effectively lower your tax bracket! Because of something referred to as The Marriage Tax Penalty, you'll be slower to get into higher tax brackets as your yearly income increases. You'll also enjoy a standard tax deduction of around 12,500+ dollars, which is excellent. 

-       Married Filing Jointly

The next logical step in discussing Tax Filing Status is to talk about Married Filing Jointly. Married filing Jointly is also referred to as MFJ for brevity. To be considered married filing jointly, you'll need to have been married by December 31st. Filling this way is convenient for spouses because (as the name suggests) you and your spouse only have to file ONE tax return as a couple.

When it comes to divorce, if you and your spouse were divorced by December 31st, the last day of the year, you aren't considered married by the IRS for the entirety of that year. However, if your spouse were to have died during the tax year, you have the option of filing married joint through the following tax year.

Another drawback of filing as Married/Joint is that both you and your spouse are responsible for any mistakes made when filing taxes (that means purposefully and accidentally). If you pass off your taxes to your spouse to be done for both of you, you'll be equally responsible for any tax fraud or accidents they may make while filing. This could mean penalties and even legal consequences.

However, it isn't all negative. When filing married joint, you'll receive a higher standard deduction than if you were to file single or file separately. You and your spouse filing jointly will also have more tax deduction and tax credits than you would if you were to file separately or single. And while this should go without saying, it's important to note that you and your spouse must both file either separately or jointly – though if you file jointly, only one tax return must be made.

-       Married filing Separately

Married filing Jointly often makes the most sense to newly married couples who aren't tax experts. However, there are situations in which you may want to consider filing separately if you are married. For starters, as we discussed in the previous section, filing separately from your partner limits your liability. For example, if your spouse were to make an accidental error when filing their own taxes, you wouldn't be on the hook for their mistake and vice versa. The apparent negative drawback to this is that you and your spouse must both file your own separate tax return. Also, as previously mentioned, if one of you files as Married Filing Separately, you both must file as that status.

Another reason married couples may decide to file separately is so that they receive a larger tax refund. For example, if one spouse's income is far higher than the other spouse's, filing separately may preserve the lower-income spouse's lower tax bracket – meaning that the spouse who makes less money could receive a larger refund and or owe less in taxes.

It may also make sense to file separately as a married couple if one spouse has much higher financial debt than the other. In a scenario like this, the IRS may decide to garnish wages to repay the debt from that partner. Filing separately may limit garnishments to the one partner who has the outstanding debt.

-       Head of Household

The Head of Household tax filing status is confusing to many Americans. It's honestly a tax filing that may not make much sense to many people until they're in a situation where they're either in a position to file as Head of Household.

To file as Head of Household means typically that you are unmarried and paying to support others. Head of Households also usually pay more than half of the cost to upkeep a home in a tax year. This doesn't necessarily mean that you make the most money in your family. Still, it means that you contribute the most money to keeping the family up and going. Keep in mind this tax filing status is exclusively for the unmarried.

Typically, this tax filing designation is used by a divorced parent who is the main supporter of their child's household or by someone who has had children outside of marriage and continues to be unmarried. As a result, it can be challenging to decipher who pays most household expenses. Still, they typically include things like mortgages, food, and insurance.

Suppose you think you may qualify as the Head of Household for tax filing purposes. In that case, I'd advise you to double-check with a tax preparation professional to be sure. I say this because the rules surrounding this tax filing status can be tricky. For instance, you may qualify for filing as Head of Household if you're still married as long as your spouse hasn't lived with you for over half of the year (six months). You may also qualify as the Head of Household if you're taking care of a relative like a sibling, parent, or grandparent and claiming them as a dependent.

-       Qualifying Widow(er) 

That brings us to our last tax-filing classification – Qualifying Widow(er). This is another example of a tax filing that, in my opinion, has strange rules. As someone whose spouse has died, you may file as Married Filing Jointly in the tax year of their death. However, in the two years following, you may file as a Qualifying Widow(er). However, you may only do this if you are supporting qualifying children who still live with you. You also must effectively be Head of Household (meaning that you're paying at least half of the expenses to upkeep your home/dependents).

There's not a whole lot more to it than that. However, filing as a Qualifying Widow(er) grants you many of the same benefits as you would have if you were Married Filing Jointly. This includes your standard deduction – which is higher than filing as single. However, after two years of filing as a Qualifying Widower, you'll have to either file as Single, Head of Household or remarry to file as Married Filing Jointly or Married Filing Separate.

What Happens if You Accidentally Choose the Wrong Status?

Filing under the correct status means that you're fulfilling the proper filing requirements and tax rates while receiving the correct deductions and credits. However, it's essential to maximize your refund and lower whatever taxes you may owe. If you choose the incorrect tax filing status, you may be hit with tax penalties, or in the worst cases, you may be pursued legally for tax fraud. The start of this process would likely be an audit from the state or federal government. Suppose you're found to be deceiving the IRS intentionally. In that case, you'll have an additional bill interest and other penalties, according to Credit Karma.

Luckily, the IRS knows that it can be easy to make a mistake or for a huge life event to unexpectedly change the way you need to file. Because of this, you can simply change your tax status by submitting an amended return to correct your mistake.

Finding Your Tax Status Made Easy

If this article spurred some anxiety in you and now you're afraid you'll choose the wrong tax status – don't worry! There are tons of ways to find out which tax status you should file as. A simple google search will unveil countless tools and surveys to decipher and determine your tax filing status. One such device is even put out by the IRS, which I'll link to here – Find Your IRS Tax Status. Otherwise, if you find that your taxes are complicated enough that you're worried about choosing the wrong status, you may want to go with a professional tax preparer. These are people who know the rules of the IRS inside and out and can absolutely help you find your tax status and answer any other questions you may have. They'll also maximize your tax refund and minimize the amount you owe in the process!

If you or someone you know is interested in talking about taxes or finding a great tax advisor who can work with you to find not only your correct tax filing status but also maximize your tax refund, you've come to the right place! While I'm not a tax professional, being in the field of finance, I have plenty of professional tax colleagues! There are professionals that I've referred clients to, and year after year, I've heard nothing but raving reviews. So if you're interested in making the most out of your taxes this year, please call or email to schedule an appointment with me. 

Together, we can create a financial plan that takes all of your tax preparation needs into account!

Until next time...this is Melissa Making Cents!

 Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is also a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.