Every year, thousands of tax filers make simple mistakes on their returns that cost them money. Ironically, one of the biggest ones is choosing the wrong tax filing status.
That’s why we put together a three-part series on selecting the correct filing status.
Today we’ll provide an overview of the different types of filing status, who is eligible for each, and how to get more information on your correct type.
Married filing statuses
If you are legally married on the last day of 2023, you must file either Married Filing Jointly (MFJ) or Married Filing Separately (MFS). You cannot file as single or Head of Household.
So, which status should you choose? Well, it depends. That answer may be a little soft. But it’s because there are so many different variables to consider. However, there are some concrete points to help you start making a decision. Let’s take a look.
Pros and Cons of MFJ
MFJ couples generally have lower tax rates compared to other statuses. They also enjoy a larger standard deduction which can reduce taxable income. They also have a more simplified filing process than MFS couples, which can help reduce errors in tax returns.
That’s the good news, but there are some potential cons. First, both spouses are responsible for any taxes owed. So, if one spouse omits something or makes an error, the other is still on the hook. And there is also the potential for higher overall tax liability if both spouses have large incomes.
Pros and Cons of MFS
If sharing tax liability with your spouse gives you pause, then MFS may be a better alternative. That’s because MFS couples are responsible only for their own tax liability.
It can also be the best route if one spouse has significant itemized deductions like unreimbursed business expenses or significant medical expenses.
MFS usually have higher tax rates than their MFJ counterparts. And they are ineligible for certain benefits like the Child and Dependent Care Credit and the Earned Income Tax Credit.
That’s the overview for married filers. Single filers have two completely different options.
Single filing statuses
If you aren’t legally married on the last day of 2023, you’ll most likely be left with two broad filing categories, Head of Household (HOH) and Single Filing (SF) status.
Head of Household (HOH)
HOH filers sometimes get lower tax rates and a higher standard deduction than SF-status filers. And unlike SF status, HOH filers can be eligible for the Child Tax Credit and Earned Income Tax Credit.
But the eligibility requirements are strict and complex. Generally, HOH status requires you to be unmarried and provide more than half the financial support for a qualifying dependent. The rules of qualifying dependents are lengthy, as well.
So, you’ll need to be familiar with the rules; consulting the IRS Interactive Tax Assistant or a CPA can help.
Single Filing status
Single filing status is for any unmarried person with no qualifying HOH dependents. If that’s you, you’ll probably enjoy the simplicity of filing. It is very straightforward compared to other statuses. And you still qualify for a standard deduction, which can reduce your taxable income. The trade-off is the potential for higher tax rates than HOH filers and fewer deductions and credits than other statuses.
Putting it all together
Tax filing can be complicated. That’s why we’ll follow up next week with a post on the ins and outs of married filing statuses. We’ll cap off the series with a more in-depth look at the intricacies of the HOH filing status.
See you next week!