IRS Audit, IRS Audit Help, IRS Problems, IRS Tax Problems

What is Your IRS Filing Status?

August 2, 2012 - IRS Audit, IRS Audit Help, IRS Problems, IRS Tax Problems

Did you know you are born with an income tax return filing status? We all start off life as Single. Even if you are a twin, you are a Single taxpayer. Can a baby be a taxpayer? Did you ever hear of the Gerber Baby? The answer is “Yes.” And as an American citizen, your taxable income includes your WORLDWIDE income. Your filing status is determined by your marital status on the last day of the calendar year. When you marry, and are married as of December 31st, you will generally choose Married Filing Jointly. Now your taxable income includes the worldwide income of both husband and wife. One of my clients asked, you mean if I get married on December 31st, I am treated as I was married ALL YEAR? And the answer to that question is YES. Maybe you want to marry on December 31st, but wait until after midnight to say “I DO!” and sign the license on January 1st. With planning you can choose the year you begin your joint return. One thing I want you all to know: “Marry the man (or the woman) and you marry their tax troubles, too.” So be sure you know all the facts and enter into this new partnership, this new joint venture, with your eyes open. Maybe you are part of an alternative lifestyle – part of a committed couple. Registered Domestic Partners of same-sex couples may have special choices for their state’s return, but not for the federal return. The Internal Revenue Service will still expect a separate income tax return for each of you. Some couples resist government intrusion into their personal lives and choose not to obtain the required state license to become married in the eyes of the law. They just share their love and share their lives. This is not a forum for the discussion of common law marriage (which is governed by your state), but the married filing status is reserved to the lawfully wedded couple. Sometimes there is trouble in paradise. Couples separate. When a married couple is still married, but living apart, they may choose Married Filing Jointly OR Married Filing Separately. If you are legally separated, have a court-issued order of separation, but are still talking to each other, you may be better off tax-wise to continue to share information and file a joint return. If you do choose Married Filing Separately, or are forced into Married Filing Separately because your spouse is not available to (or refuses to) sign a joint tax return, you will lose some of the tax benefits available on a joint return. Some of those many lost benefits include, among others, some tax credits and some education deductions. If one spouse itemizes, the other spouse MUST itemize and cannot claim the standard deduction. If you are receiving Social Security benefits, a larger percentage of those benefits may be income taxable. There are also adjustments to capital losses, passive losses, sale of residence exclusion, and others. IRA contributions and deductions can also be affected. I recommend you consult a tax professional so if you do have a choice, you can make an informed decision. If the formerly happy couple turns to divorce, the divorce decree will state in writing the agreements made by the divorcing couple. When I review a divorce decree I look to see if alimony or spousal support has been awarded. The spouse who pays alimony may deduct it. The spouse who receives alimony must include it in their taxable income. I will also look to see how any children of this marriage will be treated for tax purposes. You have to understand that the IRS is not a party to this divorce. Even though the divorce decree may specify who is to claim a particular child as a dependent, there is a specific form that MUST BE part of your tax return to protect your income tax return. Form 8332 is used by the custodial parent to release the exemption to the non-custodial parent. There are so many different rules that must be addressed here, that I will save them for another blog post. If you are a parent and there is at least one qualifying dependent residing in your home, you may qualify to file Head of Household. If you are still married, one spouse may be Married Filing Separately and the other spouse may be Head of Household IF they did not live together the last six months of the year. If you are divorced it may be easier to determine your filing status. The last filing status is Qualifying Widow or Widower. Qualifying means there are rules to follow. Of course! We are talking INCOME TAX CODE! If your spouse died within the past two years, you were entitled to file a joint return in the year of your spouse’s death, you did not remarry, and you have a dependent child or stepchild (not foster child) living with you the entire year, you may qualify as widow(er). Have you heard, “Things Change.”? How many times was Elizabeth Taylor married? Like Liz, you may find yourself returning to Single when the other filing status no longer apply to you. It’s all about saving you money!   To your lowest legal tax, Nellie Williams, EA Bullet Proof Your Taxes