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Choosing an Income Tax Filing Status

One of the first things that you have to determine when filing a federal income tax return is your filing status. There are five possibilities: single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child. Your filing status is important because it determines, in part, the types of deductions and credits available to you, the amount of the standard deduction that you may be entitled to, and the correct tax rate applicable to your taxable income. Depending on your situation, you may or may not have a choice regarding your filing status. If you have more than one option, you should choose the filing status that is most beneficial. Usually, this means the filing status that results in the lowest amount of total tax.

Your filing status depends on whether you are considered married or unmarried

Your marital status is determined as of the last day of the year

Your marital status for the entire tax year is determined according to your status on the last day of the tax year.

You got married on December 31, 2020. You are considered married for all of 2020. Let's say instead that you got married on December 31, 2019 and got divorced on December 31, 2020. You are considered married for all of 2019 but unmarried for all of 2020.                   

Divorce and separate maintenance decrees

You are considered unmarried for the entire year if, on the last day of the tax year, you are unmarried or legally separated from your spouse by a divorce or separate maintenance decree.

State law governs your legal status under a decree of divorce or separate maintenance. If, under your state's laws, you are deemed married under a separate maintenance decree, you are considered married for purposes of filing federal income tax returns.

You are still considered married if you are separated under an interlocutory (not final) decree of divorce.

If you obtain a divorce solely for the purpose of filing tax returns as unmarried individuals (with the intent to remarry) and you remarry the same individual the following tax year, you and your spouse will be treated as if you were married during the tax year.

Legal annulments

If you obtain a court decree of annulment, which holds that no valid marriage ever existed, you are considered unmarried for the tax year, provided that you have not remarried.

You must also file amended federal income tax returns (Form 1040X) for all tax years affected by the annulment not closed by the statute of limitations for filing a tax return. These amended returns should amend previously filed tax returns to single (or head of household if you qualify) filing status. The statute of limitations generally does not expire until three years after your original return was filed.

Consider carefully the tax consequences when deciding between a divorce and an annulment, particularly if you have been married for more than one tax year.

Married persons living apart

Generally, if you live apart from your spouse but are not legally separated by a decree of divorce or separate maintenance, you are still considered married. However, you are considered unmarried for the year if you meet all of the following conditions:

  1. You file a separate return (meaning that you don't file jointly).
  2. You paid more than half the cost of keeping up your home for the tax year.
  3. Your spouse did not live in your home during the last six months of the tax year.
  4. Your home was, for more than half the year, the main home of your child, stepchild, or adopted child, whom you can claim as a dependent. This qualification is also met if your home was the main home of a foster child (whom you can claim as a dependent) for the entire year.

Item 4 above is considered satisfied if your home was the main home of your child, stepchild, or adopted child for more than half the year (or a foster child for the entire year) and you could claim the child as a dependent but didn't because:

  • You allow the noncustodial parent to claim the child by means of your written declaration, or
  • The noncustodial parent provided at least $600 for the support of the dependent and claims the dependent under a pre-1985 agreement, or
  • A decree or agreement that became effective after 1984 and before 2009 allows the noncustodial parent to claim the dependent regardless of the provision for support (special conditions apply)

If you are considered unmarried because of the above criteria, you probably qualify for head of household status.

Common law marriage

You are considered married if you live in a common law marriage that is recognized in the state where you now live or in the state where the common law marriage began. This is true even if you later moved to a state that does not recognize common law marriage.

Special rules apply when your spouse died during the year

If your spouse died during the tax year, you are considered married for the entire tax year for filing status purposes. Special rules apply, however.

Planning considerations for married couples

Options available to married couples

If you are married, you generally must choose between filing a joint return (married filing jointly) and a separate return (married filing separately). While many married couples experience overall tax savings by filing a joint return, situations exist in which a joint return can result in more total tax than separate returns. You should evaluate each filing status before reaching a decision. If you lived apart from your spouse during the tax year, consider whether you qualify for head of household filing status.

Joint return means you're liable (joint and several liability)

When you file a joint tax return, you and your spouse are treated as one taxpayer. This may often be an advantage in calculating the amount of tax due, but it comes with a potentially heavy price. It means that you may be held responsible for the information on (and, in some cases, omitted from) that tax return. You may be held responsible, individually, for taxes, penalties, and interest that result from a joint tax return. You may be responsible even if your spouse earned all the income and made decisions without your knowledge.

Some protection from liability is provided to individuals who demonstrate that they did not know (nor did they have reason to know) of a substantial understatement of income on a joint return.

Pending divorce — if joint return filed, consider indemnification clause or escrow arrangement

If you're going to file a joint return while in the process of a divorce or separation, consider utilizing an indemnification clause or an escrow arrangement as a way of protecting yourself from future liability. An indemnification clause is a clause within a divorce decree that states that one spouse agrees to reimburse the other for future tax liabilities. An escrow arrangement can be used to set aside funds for estimated future taxes that will be due as the result of a joint return.

The IRS doesn't care whether you have an indemnification clause or an escrow arrangement. The IRS may still collect any tax deficiency from you.

If you lived apart from spouse during tax year, don't overlook head of household status

This is the most common mistake when it comes to filing status. If you lived apart from your spouse during the tax year and provided over half the cost of keeping up a home for you and a qualifying individual, you may qualify for head of household status.

Filing status and the timing of a divorce

Married couples sometimes wind up paying more in taxes than they would if they were unmarried and filing as single (and sometimes the opposite is true). This is often referred to as the "marriage penalty" (or "marriage bonus"). This can occur, for example, when the tax code provides tax brackets that are wider but not twice as wide as those for single filers. Spouses with earnings that are split relatively equally are more likely to experience the marriage penalty, while couples where one spouse has little or no earnings will often experience a marriage bonus.

For divorcing couples, if it would be more beneficial to file as a married couple than as unmarried individuals, you may want to consider postponing the finalization of your divorce until the beginning of the next tax year. Conversely, if filing singly would be more beneficial, you may want to arrange to obtain your divorce decree before the last day of the year. The only way to know for sure which filing status would give you the lowest total tax liability is to do the calculations both ways (jointly and singly) and compare the results.

Zack is the author of this solution article.

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