How do I determine my filing status for taxation?

When you prepare a tax return, you will have to enter an appropriate filing status to use. Your filing status is a classification that determines different aspects of your tax return such as filing requirements, tax rates, tax credits and deductions and standard deduction. There are a total of five choices of filing status, out of which you may be eligible for more than one in a particular year. In that case, it is easy to determine which status is more beneficial to you in terms of getting you the lowest taxes and largest refund. Moreover, choosing a different status may change the point at which you move between income tax brackets. The five filing statuses are explained below. 

1. Single

This is the most basic filing status requiring that you are not married on the last day of the tax year and do not qualify for any other filing status. If you were previously married and your divorce was legally finalized before the last day of the year, you can file as single for the year the divorce was finalized. Single taxpayers are eligible for a standard deduction of $12,400 for the 2020 tax year. 

2. Married filing jointly (MFJ)

Couples who were married by December 31 of the previous year are eligible to file a joint return for that tax year. It is one of the most beneficial filing statuses and allows access to valuable tax credits and a larger standard deduction and capital loss deduction. Combining incomes can also bring a higher earner into a lower tax bracket in some cases. Here, both spouses are responsible for each other's tax liability. You can also file married filing jointly even if you report no income. The standard deduction for married filing jointly for the 2020 tax year is $24,800. 

3. Married filing separately (MFS)

You can file as married filing separately if you are married and want to be responsible only for your tax liability or think their spouses might be hiding income. In some cases, you may determine that you will get a larger refund or lower tax liability than if you filed jointly. However, tax law does impose some significant limitations on married couples who file separately. They are excluded from the earned income credit, dependent care credit, education related credit, and the student loan interest deduction. The standard deduction for MFS is the same as for single filers; for the 2020 tax year it is $12,400.

4. Head of Household

Non married individuals may choose to file as head of household if they have a qualifying child or dependent.This could also include a grandchild, stepchild, foster child, adopted child, siblings, and possibly a parent as well. The taxpayer must cover more than half of the costs of running the household where the qualifying child or dependent resides for at least half of the year. Taxpayers “considered unmarried”  may also file as head of household if their spouse lived away from the home for the last six months and they covered the majority (over half) of household expenses where the dependent resides. Filing as head of household may claim a standard deduction of $18,350. 

5. Qualifying Widow with Dependent Child

You may qualify as a Qualifying Widow(er) for the two years following the year of your spouse’s death if you support a dependent child and do nor remarry. For instance, if a man died in 2019 and left behind a wife and two young kids, the women can still file jointly for the 2019 tax year. For tax years 2020 and 2021, she’ll be eligible to file as a qualifying widow, which retains the same benefits for married filing jointly status. However, if the kids are already out of the house when your spouse dies, this status may not be appropriate. The standard deduction is the same as for MFJ which is $24,800 for the 2020 tax year. 

Things to keep in mind: 

• For the married filing jointly or separately statuses, both partners must use the same filing status for the year. 
• Your marital status on the last day of the tax year (December 31) is your marital status for the entire tax year. 
• If your spouse died during the year, you are still considered married for the whole year. Even if your spouse died on January 1 (the first day of the tax year) you can file as married filing jointly for the whole year. 

Conclusion

Your tax filing status can affect which tax deductions and credits you can claim and what income tax bracket you fall in. Be clear on which statuses you are eligible for every year and which one would reap you the most benefits.