Filing Status - What Works, What Doesn't
The biggest confusion out there seems to be regarding the Head of Household (HOH Filing Status) and when a taxpayer is considered to be "married" for tax purposes. Here is a rundown of the five filing statuses available, who qualifies, and the pros and cons of each. I recommend reading this entire section before making a decision.
First - Married Filing Jointly (MFJ). Two taxpayers who are legally married who are including all of their income and deductions on one tax return. May include any number of dependents. Usually beneficial for spouses who have DISPARATE incomes (one high / one low or none at all). This is because of the way the tax tables are set up.
Second - Married Filing Separately (MFS). Two taxpayers who are legally married who want to file separate returns. I discuss this status under "Returns I Won't File" (here). May include any number of dependents on each return. This status is chosen for only one reason that I know of - legal liability. If both taxpayers sign the return, the IRS can collect the debt from either one. With separate returns, each spouse is liable only for their tax debt. So this status is usually selected for legal purposes (limiting the ability of the IRS to collect a tax debt from both spouses) and almost always results in a higher joint tax liability.
Third - Single. One unmarried taxpayer. May include any number of dependents NOT related to the taxpayer (a dependent who is a close relative would qualify the taxpayer for Head of Household, see below). If it's just you this is your only option.
Fourth - Head of Household. Usually the BEST filing status given the current tax tables. One unmarried (or MARRIED but SEPARATED) taxpayer with at least one dependent who is a close relative (child, sibling, parent, in-law). The dependent usually does NOT have to live with the taxpayer, just be (partially) supported by the taxpayer. There can only be one HOH per address. Please understand that HOH does not mean literally "head of a household". It just means you are claiming a dependent who is related to you.
The tax code says that a taxpayer who is legally married but does NOT live with their spouse for the last six months of the year can elect to file as unmarried for tax purposes. To better understand the implications of this, consider - a married couple with two kids who separated in June can file one of three ways - MFJ, MFS, or - because they can be considered unmarried - "Single" - if each claims a child they can both be HOH, which will save them THOUSANDS compared to MFJ or MFS. They must file their tax returns from separate addresses if this is the case.
Fifth - Qualifying Widow(er). A very rare filing status. A taxpayer who has dependent children and whose spouse dies can use this status for two years after the death of the spouse. The taxpayer gets the MFJ tax rates but with only one taxpayer (themselves) filing.
So How Can I Make This Work For Me?
If you are single with no dependents you have few options. If you are married with no dependents, MFJ is USUALLY the best status but not ALWAYS.
Why is MFJ not always the best when incomes are near equal? This is partly explained by the cultural history of the US. Modern-day income tax was established with the Revenue Act of 1916, primarily to finance World War One. How many women worked in this county in 1917? Almost ZERO - men went to the factories, women stayed home with the kids. Very few employers would hire a women even if she had a PHD, it would have been culturally unacceptable back then. The income tax code was NEVER designed to work with two income households and in some cases continues to penalize them.
Also - consider two taxpayers (who own/share a home) who are married vs two taxpayers who are living together. On an MFJ return, they would itemize deductions - mortgage interest, property taxes, donations, etc - let's say that's $25K for sake of argument. So their total deductions on a joint return are $25K. If the are not married, the homeowner would take the itemized deductions - $25K - on his/her return and the other taxpayer would take the standard deduction of $12K on his/her return. So in this case if they were married they would lose $12K in deductions. Wow. And if they have a child their "joint" filing status is MFJ, but their unmarried filing status would be single and HOH with a standard deduction of $18K. Again - Wow.
For those who do the long form (Schedule "A", Itemized Deductions) state and local taxes are now limited to $10K - regardless of filing status. So on a joint return all of your state, local, and property taxes are combined and limited to $10K. If you are unmarried and file two returns, you could EACH take $10K in that category since the limitation is per tax return, not per taxpayer.
Single taxpayers can claim the 2441 Dependent Care Credit (childcare and preschool) subject only to their income limitations. For married couples to claim this credit, BOTH must have earned income. Stay-at-home spouse? No credit...since that spouse can provide "free" childcare, the IRS deems paid child care to be unnecessary. Those of us who are parents know otherwise...
So how does the IRS or FTB know you are married? Well, they usually don't - marriage licenses are issued by county agencies, not the state or federal government. They will know you are married when you tell them. How do you tell them? (1) If you file a joint return (2) If you change your last name and (then) file from the same address. If you never change your name and never file from the same address they simply have no way of knowing.
Special Case for HOH - suppose you and your ex have one kid and are separated. Can you both claim your child? ANSWER - Yes AND No. Only one person may claim the child as a DEPENDENT. This usually benefits taxpayers with lower incomes (under $30K). Only one person may claim the child as a qualifying child for HOH filing status. This usually benefits taxpayers with higher incomes (over $30K). So the taxpayer with the lower income can file SINGLE and claim the child as a dependent and qualify for the CTC and EIC, the taxpayer with the higher income can claim the child NOT as a dependent but as a qualifying child for HOH filing status. Win-Win if you meet all the criteria. If one taxpayer claims the child as a dependent and files HOH the other taxpayer almost ALWAYS loses much more money than the first taxpayer gains by doing this.
Recommendations? - (1) Do NOT change your filing status every year unless it REALLY does change. Changes are more likely to get the attention of the IRS. Pick a filing status that works for you and stick with it. (2) Consider CAREFULLY the tax aspects of marriage. It is usually a one-way door. Once you file MFJ it is very hard to change your filing status short of separation or divorce.