When it comes to filing taxes, there are many things we can do to reduce our liability. We can claim certain deductions. We can look into our eligibility for certain credits. And during the tax year, we can keep track of deductible expenses. But there’s one really simple thing that can reduce our tax liability which many taxpayers overlook, and that’s choosing the correct filing status.
Your filing status determines your standard deduction. It also impacts whether or not you may take certain credits. So it’s very important to choose a filing status that applies to your situation. If more than one could apply, choose the one that will result in the lowest tax liability. Here are the details about each of the five filing status options:
* Single ? If you have never been married, you must use the “Single” filing status. It also applies if you are divorced, and depending on state law, may apply if you are legally separated. This filing status is subject to high tax liability.
* Married Filing Jointly ? Most married couples file their returns jointly. This filing status has the highest standard deduction, and it qualifies for most tax credits. Those whose spouses died during the tax year are also eligible to file a joint return for that year.
* Married Filing Separately ? Married couples may elect to file separate returns. In most cases your refund will be larger if you file jointly, but there are some reasons why you might choose to file separately from your spouse. Perhaps one spouse wants to file and the other doesn’t, or one owes taxes and the other would get a refund. In some states, those who are separated but not yet divorced may also use this filing status.
* Head of Household ? Unmarried taxpayers who pay more than half the cost of maintaining a home for themselves and a dependant may qualify for this filing status. If you qualify, it offers more tax advantage than filing as single.
* Qualifying Widow(er) with Dependent Child ? If your spouse died within the last two years and you have not remarried, you may be able to use this filing status. But you must have cared for a dependant for the entire year to qualify. Qualifying widows and widowers get the same tax rate and standard deduction as those who are married and filing jointly.
Selecting the right filing status can make a huge difference in your tax liability or refund amount. If you’re unsure which status would be the most advantageous for you, a tax professional can help you choose. By making the effort to choose the best filing status, you can hang on to more of your money.
