Tax season may have passed for most but taxpayers in general still need to know their correct filing status and be familiar with each option.
Single or Married
Generally, the taxpayer’s filing status depends on whether they are single or married on Dec. 31 and that determines their status for the whole year. However, more than one filing status may apply in certain situations. If this is the case, taxpayers can usually choose the filing status that allows them to pay the least amount of tax, according to an IRS news release.
When preparing and filing a tax return, the filing status affects:
- If the taxpayer is required to file a federal tax return.
- If they should file a return to receive a refund.
- Their standard deduction amount.
- If they can claim certain credits.
- The amount of tax they should pay.
Here are the five filing statuses:
- Single. Normally this status is for those taxpayers who are unmarried, divorced, or legally separated under a divorce or separate maintenance decree governed by state law.
- Married filing jointly. If a taxpayer is married, they can file a joint tax return with their spouse. When a spouse passes away, the widowed spouse can usually file a joint return for that year.
- Married filing separately. Married couples can also choose to file separate tax returns. When doing so it may result in less tax owed than filing a joint tax return.
- Head of the household. Unmarried taxpayers may be able to file using this status, but special rules apply. For example, the taxpayer must have paid more than half the cost of keeping up a home for themselves and a qualifying person living in the home for half the year.
- Qualifying widow(er) with dependent child. This status may apply to a taxpayer if their spouse died during one of the previous two years and they have a dependent child. Other conditions also apply.
In the end, these are important tips and suggestions that taxpayers should be familiar with for now and into the future. The net tax filing date is Thursday, April 15, 2021.
More Taxpayer Info
Terms to help taxpayers better understand Individual Retirement Arrangements
Many taxpayers may have heard of Individual Retirement Arrangements, or IRAs, but some don’t know how IRAs help them save for retirement.
People can set up an IRA with a bank or other financial institution, a life insurance company, mutual fund or stockbroker. Here’s a list of basic terms to help people better understand their IRA options.
- Contribution. The money that someone puts into their IRA. There are annual limits to contributions depending on their age and the type of IRA.
- Distribution. The amount that someone withdraws from their IRA.
- Required distribution. There are requirements for withdrawing from an IRA:
- Someone generally must start taking withdrawals from their IRA when they reach age 70½.
- Per the 2019 SECURE Act, if a person’s 70th birthday is on or after July 1, 2019, they do not have to take withdrawals until age 72.
- Special distribution rules apply for IRA beneficiaries.
- Traditional IRA. An IRA where contributions may be tax-deductible. Generally, the amounts in a traditional IRA are not taxed until they are withdrawn.
- Roth IRA. This type of IRA that is subject to the same rules as a traditional IRA but with certain exceptions:
- A taxpayer cannot deduct contributions to a Roth IRA.
- For some situations, qualified distributions are tax-free.
- Roth IRAs do not require withdrawals until after the death of the owner.
- Savings Incentive Match Plan for Employees. This is commonly known as a SIMPLE IRA. Employees and employers may contribute to traditional IRAs set up for employees. It may work well as a start-up retirement savings plan for small employers.
- Simplified Employee Pension. This is known as a SEP-IRA. An employer can make contributions toward their own retirement and their employees’ retirement. The employee owns and controls a SEP.
- Rollover IRA. This is when the IRA owner receives a payment from their retirement plan and deposits it into a different IRA within 60 days.