Most of you will not send love notes with your tax returns to Uncle Sam this year. There’s something just a little creepy about that guy. But, as you and your admirer celebrate your love this Valentine’s Day, give a thought to what Uncle Sam might think of your relationship. The IRS does not follow the same relationship rules as Facebook, so we put together the summary below to help you choose the right tax filing status.
The IRS offers the following filing statuses:
- Married Filing Jointly (MFJ);
- Married Filing Separately (MFS);
- Head of Household (HOH); and
- Qualifying Widow(er) (QW).
Individuals that are not married must file as either: Single, HOH or QW.
Married individuals must file as either: MFJ, MFS or HOH.
Like making a reservation at your date’s favorite Italian restaurant? Well imagine the hostess says they’re only offering a Prix Fixe menu that explores the versatility of kale and the earliest they can seat you is 10:50pm. Now you have the right mindset to continue.
When Are You Considered Married?
Many couples mistakenly believe they have a choice of filing single or married in the year the get married. However, tax law is clear that marital filing status is determined on the last day of the tax year (generally December 31). A person is considered married for the entire year if on the last day of the year:
- Both spouses are married and living together; or
- The spouses are married and living apart, but not under a decree of divorce.
This rule applies to both opposite and same-sex married couples.
If you are considered married, you must file as either MFJ, MFS or, on rare occasions, HOH.
Married Joint or Married Separate?
If you are married, you and your spouse have the option of filing as either MFJ or MFS. Often, spouses will choose the filing status that results in the lowest combined tax. This is almost always the MFJ status. This is due to the "averaging" effect of combining two incomes, which can bring some income out of a potentially higher tax bracket if the couples filed MFS. If one spouse has $75,000 of taxable income and the other has just $15,000, filing jointly instead of separately for 2015 can save $2,245 in taxes. In addition, the items below are not available to individuals that file as MFS:
- Child and Dependent Care Credit;
- Adoption Expense Credit;
- American Opportunity Tax Credit;
- Lifetime Learning Credit ;
- Credit for the Elderly or the Disabled (unless you and your spouse lived apart for the entire year);
- Qualified Education Loan Interest Deduction
- IRA Contributions (if either you or your spouse was covered by an employer retirement plan);
- Exclusion for Adoption Assistance Payments; and
- Exclusion of interest income from series EE or Series I savings bonds you used for higher education expenses.
Separate But Not Equal
In addition to forgoing the items above, if you decide to file MFS, you will not go back to using the single rates that applied before you were married. Instead, each spouse must use the MFS rates. These rates are based on brackets that are exactly half of the MFJ brackets, which almost always end up being much less favorable than the "single" rates.
On rare occasions, the MFS status can yield tax savings for a couple. These situations occur when one spouse has significant amounts of medical expenses, casualty losses, or "miscellaneous itemized deductions" and the other spouse has significant income. Since these deductions are reduced by a percentage of adjusted gross income (AGI), if the deductions are isolated on the separate return of a spouse, that spouse's lower (separate) AGI can cause a larger portion of the deductions to be allowed.
Joint & Several Liability
While filing MFJ often results in you paying less total tax, it also makes each of you jointly and severally liable for the tax on your combined income, including any additional assessed tax, interest and most penalties. This means that the IRS can come after either of you to collect the full amount. Although provisions in the law offer relief from joint and several liabilities, each provision has its limitations. Even if a joint return results in less tax, you may file a separate return if you want to be certain of being responsible only for your own tax.
Filing HOH When You Are Married
It is sometimes permissible to file as HOH even though you are legally married. HOH is often preferable to filing as MFS due to the slew of reasons listed above. To file as HOH while you are married, you must meet the following requirements:
(1) Your spouse cannot have been a member of the household for the last six months of the year;
(2) Your home must be the principal living place of a child of yours whom you can claim as your dependent (or could have claimed as your dependent except that you signed away your right to the exemption to the child's other parent), for more than half the year; and
(3) You must furnish more than half of the cost of maintaining the home. This includes all house-related costs, plus the cost of food consumed in the home.
Note that if both you and your spouse meet these tests (e.g., you have more than one child and each has custody of a child), both of you can qualify to file as HOH. If only one meets the tests, then the non-qualifying spouse must file as MFS.
Domestic Partners & Civil Unions
Domestic and civil union partners cannot file joint returns together (MFJ or MFS). A domestic or civil union partner can file as head of household if he or she meets the requirements for that filing status. However, maintaining a home for the other partner, or for a child of the partner who is not the taxpayer's biological or adopted child, doesn't entitle a taxpayer to file as head of household. Our LGBT Tax Consulting Practice can help you navigate these laws.
Learn more about the tax implications of divorce, including filing status considerations, in our previous two-part post Life Transitions: Tax Implications of Divorce or Legal Separation – Part I and Part II.
There are many things to consider when determining your tax filing status, especially if you are married. There are also state tax implications that should be considered. Contact us if you need assistance in determining the most tax advantageous filing status for you and your Valentine. We are happy to help with this or any tax-related matter.