What's your tax filing status? Seems like a simple question. But simple just isn't in the IRS's vocabulary. Your status can depend upon when you married, when your spouse died or who else lives in your home. A mistake can be costly. So, here's what you need to know.
If you are unmarried as of Dec. 31, you generally must file as a single person for that year. Why? Because your marital status at year end applies for the entire tax year. Naturally, there are some exceptions. See Qualifying Widow/Widower and Head of Household, below.
If you are married at year end, you can file a joint return with your spouse. Alternatively, you can file under married filing separate status, which requires preparing two 1040s (one for each spouse) instead of just one joint 1040.
If you lived apart from your spouse for the last six months of the year, you may also qualify for head of household status, as explained later.
When a spouse dies during the year, the surviving spouse can generally still file a joint return with his or her deceased mate for that year.
If your spouse dies, you may be able to continue using the favorable joint-return tax brackets for up to two years after the year of death. During those years, you must remain single and also pay over half the cost of maintaining a home for a dependent child. After the two years are up, you may qualify for head of household status.
Head of Household
Generally you must be single to file as a head of household (HOH). However, a common — and expensive — error is filing as a single taxpayer when you actually qualify as an HOH. As a head of household, you are entitled to more generous tax brackets and a bigger standard deduction. Plus various other tax rules are much more favorable for HOH filers than for singles.
Say you are single and have an unmarried child or grandchild (adult or otherwise) who lives with you for over half the year. If you pay over half the cost of maintaining your home, you should be filing as an HOH. This is true even if the child or grandchild has too much income (over $3,200 for 2005, or over $3,100 for 2004) to be claimed as your dependent.
If you are single and can claim your parent as a dependent, you can probably file as a head of household too. In this case, you are an HOH if you pay over half the cost of maintaining your dependent parent's home, whether or not your parent actually lives with you.
Finally, you can generally file as an HOH if you are single and pay over half the cost of maintaining the principal home for yourself and another relative who: (1) lives with you over half the year, and (2) can be claimed as your dependent.
You may also qualify if you were still married at year end and lived with your child but apart from your spouse for at least the last half of the year. This is the so-called abandoned spouse rule. It's the only exception to the general rule that you must be single to be an HOH.
Phew! Is it any wonder people get confused here?
Married Filing Separate
Married individuals are not required to file joint returns. They can choose to file separate 1040s, with each return listing that spouse's share of the couple's income and deductions. In some cases, this can pay off.
For example, say your husband has relatively low income but high medical expenses, while you have low expenses but high income. The medical expense deduction is limited to the amount in excess of 7.5% of the taxpayer's adjusted gross income (AGI). If you file jointly, your high joint AGI wipes out any chance for a medical expense deduction. But if your husband files separately, his low AGI may permit a substantial write-off. (If one of you itemizes deductions, you both must.)
Unfortunately, there are several problems with filing separately. Under the laws of some states, a married couple's income is deemed to be split 50/50, regardless of which spouse actually earns the dough. The same 50/50 income split must then be used if the spouses file separate 1040s. In some states, expenses are also generally considered to be split 50/50. In other words, the laws of your state may effectively disallow any hoped-for advantages from filing separate federal returns.
In addition, married filing separate status precludes eligibility for various federal tax breaks — including the Roth IRA conversion privilege, the college education tax credits, the college loan interest write-off, the child and dependent care tax credit and the adoption tax credit. You are also each limited to a $1,500 net capital loss deduction (vs. the normal $3,000 limit) and will probably have to file separate state income tax returns as well.
All in all, filing separately is rarely a good idea — unless you are estranged from your spouse. In this case, a separate return can make sense, because it shields you from any liability for your spouse's federal income tax misdeeds. So if you are separated and have any doubts about your spouse's tax situation, you should strongly consider filing separately.