Federal Income Tax: Filing Status and Dependent Rules

 

Students: You’ll need to know details on all FIVE filing statuses. You’ll also need to know the nitty-gritty multi-part dependency test rules - this pages covers the basics but not the full details.

Individuals: Your status should be clearly defined! Make sure you understand the details and specifics. If you have kids it is good to understand details on claiming them. For special situations (divorce, foster child, college age children) it is especially important to understand the rules and options.

Advisors/Professionals: Understanding taxes is VITALLY important to providing good financial planning advice to clients.

Income Tax Filing Status

  • Typically 95% of personal taxpayers (not C corporations) file as SINGLE, HEAD OF HOUSEHOLD (“HoH,” think “single parent”), MARRIED FILING JOINTLY (“MFJ”)

    • The other two status are MARRIED FILING SEPERATELY and QUALIFYING WIDOWER

    • IRS TOOL: What is my Filing status?

    • NERDWALLET ARTICLE: How do I choose the right Tax Filing Status

    • Your filing status is based on your 12/31/XX marital/parenting status. If you get married on 1/1 or 12/31 - you can file MFJ. If you get divorced on 1/1 or 12/31 -you file single or HoH. If you have a child anytime throughout the year you could file HoH (if single) and also receive the full child tax credit for the tax year (more on that later).

    • Different between Single and Head of Household status? Why do they exist?

      • The government, through the tax code, wants to provide relief/support to lower income families (i.e. keep people out of poverty) and also encourage having children (good for future economy). The HoH status has slightly expanded 1st and 2nd tax brackets and gives an approximately 1.5x larger standard deduction.

      • Bottom line -what do you save? Up to $1,458 through the tax bracket expansion (compare the two brackets). Plus the savings if you use a standard deduction which is increased from (2021) $12,550 to $18,800 - you’d save your “marginal bracket” (top tax bracket) which would result in a tax savings of $1,375 (if in the 22% bracket) or $750 (if in the 12% bracket). (you also could be in other brackets but these two are the most common…) In addition, you’d get a child tax credit (per qualifying dependent child).

        • Is this a big deal? If you are a single parent doctor making $400,000 a year? NOPE (you’ll hardly notice) If you are a single parent waitress(er) making $28,000 a year? ABSOLUTELY

      • Investopedia article on head of household status

    • Married and a spouse dies? Rules are slightly different for a married couple when one dies. In the year of death, the surviving spouse can still file MFJ! (always)

      • If no dependents, after the year of death, they’d file single (unless/until they get remarried).

        • Example: married couple (could be in their 30s or 70s) with no dependents. Spouse dies in 2021. Surviving spouse files MFJ in 2021 and single in 2022+ (until they get married or have a child and would claim HoH).

      • If dependents, after the year of death, you can file “qualifying widow(er)” for 2 years. This basically grants the same brackets as if you were married (MFJ). After those two full years, you’d file HoH (if you still had dependents) or else single.

        • Example: married family (parents in 30s, 2 children ages 4 and 7). Spouse dies in 2021. Surviving spouse files MFJ in 2021, qualifying widow(er) in 2022 and 2023, and HoH (head of household) for the following few years (depending on how long kids are dependents for tax purposes).

      • efile article on qualifying widow(er) status

  • There is also a “trust and estate” tax bracket that has very “short brackets” (you pay more tax sooner). You won’t see this in action much - mainly for trusts that pay tax at the “trust level” (rare) and for estates that are opened over multiple years (encouraging estates to be distributed and closed).

 

Dependency Rules