When you fill out Form 1040 on your individual tax return, you'll be asked to declare your filing status. While this might seem like one of the most straightforward questions on your tax return, your filing status can affect your tax bill and have a huge impact on your bottom line.
"Your filing status relates to your tax rate and also some deductions and credits that you're able to claim, and in some cases it will also affect how much your tax refund is," says Lisa Greene-Lewis, a certified public accountant and tax expert at TurboTax.
There are five options for filing statuses: single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent children. Your filing status is determined on December 31 of each year. So even if you were married on New Year's Eve, for example, tax-wise, you're treated as if you were married that entire year.
If your filing status changed in the past year because you got married or divorced, or if you expect it to change this year, it's definitely a good idea to get a sense of how this shift will affect your taxes. And if you're already married, it pays to weigh the benefits of married filing separately versus married filing jointly.
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A tax bracket is a range of incomes that is subject to specific tax rates set by the IRS. There are currently seven different federal tax brackets and the one you fall into depends on your income and filing status.
Each year, the government sets the tax brackets and accompanying tax rates, which then determine how much tax you'll pay. For both the 2019 and 2020 tax years, the seven federal income tax brackets are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, the income ranges for each bracket have changed slightly.
Once your income exceeds a certain threshold, you move into a higher tax bracket and the additional dollars earned are taxed at the higher rate.
Because most tax brackets for married couples are double those for single filers, having a spouse who earns significantly more or less than you could drastically change your tax rate.
Say you're earning an annual salary of $40,000 as a single filer. This means you fall within the 22% tax bracket. If you get married and your spouse is earning $150,000, filing your taxes jointly means that your income would exceed the 22% tax bracket and your tax rate would increase to 24%.
If you're earning $40,000 per year and your spouse earns $20,000, though, filing your taxes jointly could actually be more beneficial than filing separately because it would decrease the rate at which your income is taxed from 22% as a single filer to just 12% jointly.
Your filing status relates to how much of a standard deduction you're going to be able to claim. The standard deduction is a set dollar amount that reduces your taxable income.
In 2020 the standard deduction is $12,400 for single filers and married filers filing separately, $24,800 for married filers filing jointly, and $18,650 for heads of household.
"Sometimes it may be beneficial, like if you have two high-income earners, they may see that their taxes are lower filing separately. It's really about evaluating your income," says Greene-Lewis. "Usually, for high-income earners, it may not always make sense to file jointly, but it just depends on where they fall with the tax rate."
Greene-Lewis says that where joint filers can really benefit is in their eligibility for certain credits and tax deductions.
Being married to someone who earns a lot more or less than you do can shift your eligibility for certain credits. For example, the extent to which you can deduct IRA contributions depends on factors including your filing status and how much you earn.
That's why it's important to know exactly how the status you declare can help you save, or where you may end up missing out. The IRS lists filing status requirements for each credit and deduction you may be eligible for.
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In particular, couples who are married but filing separately often find that they don't qualify for certain tax breaks.
"The Earned Income Tax Credit, that's the credit meant to give people an incentive to work, so you have to earn income in order to get it. But one thing to point out about that credit is that you can't claim it if you file married filing separately. You may claim it if you're single, head of household, or filing jointly," says Greene-Lewis.
But filing separately can sometimes save you money in specific circumstances. "If you're filing jointly, and you're not seeing the benefit of those additional tax credits, you may see more of a benefit filing separately," she says.
When declaring your status, Greene-Lewis says to be aware of how your filing status will affect your finances or your joint finances with your spouse, so that you can come up with a plan for meeting your money goals.
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