Choosing the Right Filing Status Can Save Your Hard Earned Money
Our money is always hard-earned. Right filing status We work day in and day out to earn our living and so do not like to part with our hard-earned incomes.
However, paying income tax is our federal duty and every year we are required to pay tax on our incomes. Our filing status determines the amount of tax we are supposed to pay.
There are five distinct types of filing statuses. Did you know that choosing the correct status can help you in saving taxes?
Yes, you heard me right. Despite there being five different statuses, you can qualify for more than one status. In such a case, choosing the most beneficial status (read the status which saves maximum tax) would help you save your hard-earned money. Want to find out how? Let’s breeze through the five filing statuses first.
Divorced, widowed without having dependents, legally separated or married individuals fall under this status. You can also qualify under this status if you are not a primary caregiver to a dependent for more than 6 months or if you do not qualify under any other statuses.
2. Married filing separately
If you are married and both you and your spouse are earning members, you can opt to file your returns separately. If you choose to do so, your tax filing status becomes ‘married filing separately’.
3. Married filing jointly
If you are married, you can also file joint returns instead of filing separately. Filing jointly lets you avail good tax exemptions. Moreover, if you are married and your spouse died during the year, you can file your returns under this status for the year in which your spouse died.
4. Head of household
To qualify for this status, you should be unmarried and should have borne the cost of yourself and a dependent living with you for more than 6 months. You can also qualify for this status if you are married but are living apart from your spouse for more than 6 months and also maintaining a separate home for yourself and a dependent.
5. Qualifying widow/widower with a dependent child
If you are a widow or a widower living with your dependent child, you qualify for this status. You should be unmarried post your spouse’s death to qualify for the status. Moreover, you can claim the benefit of this status for a maximum of 2 years after your spouse’s death.
These are the five filing statuses for filing your returns.
How the right status saves your money?
If you qualify for one status, you have to file your taxes as per the tax bracket of that status. But what if you qualify for more than one status? For instance, if you are married, you can either file separately or jointly. In these cases, you should choose the status which gives you maximum tax exemptions. Your filing status determines –
- Your standard deduction – this deduction lets you reduce your taxable income by a specified amount depending on your filing status. For instance, if you qualify for single or married filing separately, you get a deduction of $6300, but for filing jointly or being a qualified widow, the deduction rises to $12,600. Similarly, head of households can claim a deduction of $9300.
- Your tax liability – the rate of tax applicable on your taxable income depends on your filing status. Different statuses have different tax brackets based on which your tax liability is computed. For instance, if you are married but file separately, any income up to $9275 would be taxed at 10% but if you file jointly, the 10% tax rate would apply to incomes up to $18,550.
So, when you qualify for more than one status, sit with your calculator. Compute your tax liability under each status and then choose the one with the lowest tax incidence.
Even the IRS urges you to take advantage of these filing statuses to lower your tax liability and save your hard-earned money.
So, now you know how you can save money on your taxes. Just a simple knowledge of your filing status is enough to help you. So, find your status today and lower your tax liability.