A new status often means new tax implications (and strategies).

Take a look:

Did you Change your Status to Single?

While breaking up with a boyfriend/girlfriend is easy relative to going through divorce, annulment, or legal separation (Just donate his/her stuff to charity and call it a day!), don’t make the situation worse by ignoring important tax considerations. Among them: property settlements, alimony (It’s fully taxable as income to the recipient and provides an “above the line” deduction for the payer); and kids. Who get the tax benefits and exemptions as it pertains to them? Generally, the custodial parent does, but check your divorce decree to see if it specifies otherwise. As for filing status, many divorced people file as Single. However, if you are divorced and at least one of your kids lives with you, you are a custodial parent and will most likely be able to file as Head of Household. That’s a good thing – HOH status generally results in a much lower tax bill. Separated?  You can file as Married Filing Separately or Married Filing Jointly, but filing jointly is typically the most beneficial status (see below).

Did you Change your Status to Married?

If you exchanged “I Do’s” anytime in 2010–even if you got married just seconds before the ball dropped on New Year’s Eve–you will be considered legally married for the full tax year. One of the first things you need to do – in addition to contacting the Social Security Administration if you changed your name – is change your filing status.  You can either file as married filing jointly or married filing separately.  In some situations, you can even file as head of household, but you cannot file as single. What’s typically the best way to go? Married filing jointly.  It provides the lowest tax liability and the highest standard deduction. Yes, there are some situations where it might be advantageous to file separately – for example, if one taxpayer has high medical expenses and very little income, or if you suspect your spouse is involved in fraudulent behavior – know that when you file separately you lose valuable credits and deductions, from education benefits to student loan interest deductions and more.

Did you change your status to Engaged?

As you prepare for this next chapter in your life, don’t let the excitement and joy of it all prevent you from having a conversation about your financial future. Before you walk down the aisle, know where your soon-to-be spouse would like to be in 5, 10 years, what assets/liabilities they have (Does he/she owe back taxes? Child support from a former marriage? Has he/she defaulted on student loans?), how you’re going to tackle any existing debt, whether you’re going to keep your finances and investments separate or combine them, how you will handle daily spending decisions, and who will be responsible for paying the bills and preparing the taxes. At this time, you’ll also need to think about changing your withholding.

Did you change your status to In a Relationship?

Not all those in a relationship cohabitate, but for those who do, there are some tax implications.  No doubt, there are more couples living together these days–7.5 million opposite-sex couples in 2010, according to the US Census Bureau. That’s 13% more than in 2009. While some heterosexual couples living together can enjoy the rights of marriage without getting hitched the traditional way by claiming common law marriage (recognized by law in over a dozen states), most unmarried couples—especially same sex couples–are up against numerous financial hurdles compared with their married peers. From who gets the homebuyer credit to who claims the kids to health insurance coverage (The IRS doesn’t recognize domestic partners–That means benefits provided for your partner are treated as taxable income) to how you should structure purchases to maximize tax advantages, there are many issues to consider.

Did you change your status to It’s Complicated?

I’ll be honest… I’m not entirely sure what “It’s Complicated” means! If you changed your status to this option in 2010, chances are your taxes are the least of your worries.

1. Time your marriage to minimize taxes. If both you and your beloved are employed, you might pay more taxes as a married couple, so it might be better to marry the following January than December. But if one of you earns most of the money, you might pay less, so a December wedding might be wise. You can use tax software like TurboTax to project your tax liabilities to help you decide.

2. File joint income tax returns (in most cases). Married couples filing separately are barred from many deductions and credits. File separately if your attorney advises you to keep your income separate to clarify child support or alimony issues.

3. Review your retirement plan contributions. If you weren’t able to contribute the max to your retirement plans when you were single, combining forces with your honey may finally allow you the financial flexibility to up your contributions, which will lower your taxes.

4. Change your withholding status. File a new W-4 with your employer to revise your withholding status from single to married, so that you aren’t surprised with extra taxes at year end.

5. Donate extra household goods by year end. When combining households, you may have ended up multiple small appliances and housewares. As you pare down to make room for everything, box up your exceed household goods and donate them to charity. Make a list before you do, so you can use It’s Deductible for free to calculate the value of your donated items, and store the information for tax time.

6. Notify the Social Security Administration if you changed your name. If you’ve changed your name or adopted a hyphenated name, report your name change to the Social Security Administration. Go to www.ssa.gov and download form SS-5. Take the form, plus your marriage certificate and your driver’s license or passport, to the SSA office. Do it now to you’ll avoid any potential matching problems when you file your next tax return.

7. If you bought a new home, deduct the points. Points paid when you acquire your home are deductible in that year. Points paid to refinance a loan must be written off over the length of the loan. If you refinance in the future, don’t forget to write off the remaining unamortized points in the year you refinance.

Nine states require same-sex couples who have legally joined to file their state tax returns “as married.” However, the federal government does not recognize those relationships. That means same-sex couples in those states must continue to file their federal returns individually, not as a couple—and that’s where it gets interesting.

Three federal tax returns must be prepared: a single federal return for partner one; a single federal return for partner two; and a pro forma, or “dummy,” married federal return to be filed only with the state. That allows the numbers to come out right on the state tax return. If using e-file, each of the single federal returns should be prepared and e-filed prior to the preparation of the dummy federal return.

Massachusetts, Vermont, Iowa, New Hampshire, and Connecticut all provide marriage equality to same-sex couples. California, Oregon, and the District of Columbia have Registered Domestic Partnerships, while New Jersey provides civil unions. Same-sex couples married in California between June 16, 2008 and Nov. 4, 2008—when same-sex marriage was afforded by the courts—also must file “as married.”

As a same-sex couple you may think you have to go to tax pro to handle your unique tax situation. But TurboTax can walk you through it. If you tell TurboTax you live in New Jersey, for example, you’ll get the option of selecting “civil union” as your martial status. The next thing you’ll see is a step-by-step guide to filing your returns followed by a customized interview experience that keeps you on track through the entire filing process.

If you’re a same-sex couple in this situation, we recommend you use the desktop version of TurboTax. That’s because you can prepare and file up to five federal returns and a state return for one low price ($59.95 for the Deluxe version compared to over $200 for going to a pro). The desktop products also allow you to save a return under a new file name so you don’t have to re-enter all the information in your dummy federal return. That’s a lot of time saved.

For most couples, a filing status of “married filing jointly” will get them the best outcome. However, if you need to file “married filing separately,” you can do it in many of those nine states (we recommend you research “community property” states first). That would require you to create two dummy federal returns and two state tax returns, for a total of six.

Tax returns for Registered Domestic Partnership, civil union, or same-sex marriage couples can be e-filed in all nine states that require them to file as married. Remember to select only the state e-file button when filing your joint state return. This will send the dummy federal return with the state, but not to the IRS.

In general, e-filing is the fastest way to get your refund.

The second option is to itemize your tax deductions such as mortgage interest, property taxes, charitable tax donations, state and local income taxes, and medical expenses (if they exceed 7.5% of your adjusted gross income). The categories I’ve just listed are the larger and more common of the expenses you might be able to deduct from your expenses.

The simplest way, to be honest, is to let your tax preparation software do it for you. All tax preparation packages will walk through all of your deductions and do the math for you, the decision of whether or not to itemize is a common one year in and year out.

Calculate Your Itemized Deduction

As a general rule of thumb, and there certainly many exceptions, if you don’t have a home mortgage then taking the standard deduction is likely the better option. However, if you want to be 100% sure, you will need to get a copy of the Form 1040 Schedule A and fill it out.

Schedule A is a two-page form (the second page is a Worksheet for line 7, which covers new motor vehicle taxes) that covers itemized deductions and it lists every possible tax deduction. It’s separated into 7 sections:

1. Medical and Dental Expenses

2. Taxes You Paid

3. Interest You Paid

4. Gifts to Charity

5. Casualty and Theft Losses

6. Job Expenses and Certain Miscellaneous Deductions

7. Other Miscellaneous Deductions

Once you’ve filled out this form, compare your total deductions against the amount you would receive as a standard deduction. You will want to choose the option that gives you a greater reduction in your taxes.

What if they are close?

If your itemized deduction is very close to what you could get as a standard deduction, you may want to pick a standard deduction. If you claim a standard deduction, you may be eligible to fill out the much simpler 1040EZ form. Also, you would not need to maintain a record of your itemized deductions because you never claimed them.

In the end, you will want to make the decision that makes the most financial sense to you and puts more of your money back into your pocket.

IRS Filing Requirements

If you’re a U.S. citizen, resident, or a resident of Puerto Rico and you meet filing requirements, you are required to file a income tax return.

IRS’ Publication 17 has some factors to check and see if you need to file a tax return.

• Gross Income: All your income including wages, tips, capital gains, tips, gambling winnings, and more should be included on your income tax form.
  • Single: $8,950
  • Married (filing separately): $3,500
  • Married (filing jointly): $17,900
  • Head of Household: $11,500
  • Qualifying widow(er): $14,400
    

    Tax Filing Requirements

• Filing Status: The five filing statuses are single, married (filing separately), married (filing jointly) , head of household, and qualifying widow(er) with dependent child. Your filing status have a bearing on the deductions and exemptions you can take.
• Age: If you’re 65 or older, you can have a higher gross income before you’re required to file taxes.
  • Single: $10,300
  • Married (filing jointly) one spouse 65 & older: $18,950
  • Married (filing jointly) both spouses 65 & older: $20,000
  • Head of Household: $12,850
  • Qualifying widow(er): $15,450
• Dependent: Children are generally reported on their parent(s)’ tax return. Some dependents over 18 may be required to file your taxes.

What exactly is your adjustable gross income?

Something that has many people stressed out with taxes is the terminology. Don’t worry. Your adjustable gross income is basically your entire gross income minus any allowable deductions. Some deductions include:

• Health Savings Account
• Moving Expenses
• Self-employed Health Insurance
• Alimony Paid
• Student Loan Interest
• Tuition and Fees

Your adjustable gross income is not the same as your taxable income.

What’s the difference between your adjusted gross income and taxable income?

After you have calculated your adjusted gross income (line 37 on the 1040), you are then allowed to either take a standard or itemized deduction. It would be wise to compare and see if the standard or itemized deduction is best for you. After you subtract that from your adjusted gross income, you now receive your taxable income amount (line 43 on the 1040).

From your taxable income, you can determine how much tax is due for the year. Later you can see if you underpaid( meaning you owe more tax) or overpaid (you will be receiving a refund).

Final Thoughts

How are you preparing this tax season?

It sounds simple, but having the right tax filing status is very important. Your tax filing status is a factor in the standard tax deduction you can take and your tax rate. On your 1040, 1040A, or 1040EZ, you will make your tax filing status selection on line 5.

Tax Filing Status

What are the five options tax filing status?

Right now the IRS recognizes 5 options for tax filing status.

• Single
• Head of Household
• Married Filing Jointly
• Married Filing Separately
• Qualifying Widow(er) with Dependent Child

I’ll describe them more in a bit. If you somehow qualify for more than one status, consider filing with the status that can give you the lowest tax rate. For example, if your status is married filing jointly or qualifying widow(er) with dependent child, you generally have the lowest tax rate.

What is the standard tax deductions you can take?

The IRS adjusts the amount due to factors such as inflation. For 2009, the standard tax deductions are:

• Single: $5,700
• Married (Filing Separately): $5,700
• Head of Household: $8,350
• Married (Filing Jointly): $11,400
• Qualifying Widow(er) with Dependent Child: $11,400

Note: If you’re 65 or older and/or you are blind (as determined by a eye doctor), you may be entitled to a higher standard deduction.

As you can see with the different statuses, you can significantly lower the amount of your income that is taxed by choosing a filing status that fits your circumstances.

What are the qualifications for each tax filing status?

Single

On December 31 of the tax year you filing for, you’re considered single by the IRS if you:

• were never married
• were legally separated or divorced
• widowed before January 1 and did not remarry during the tax year

Depending on your personal circumstances, you may be able to get a lower tax if you fall under widow(er) with dependent child or head of household.

Qualifying Widow(er) with Dependent Child

You’re considered a qualifying widow(er) if you, as of December 31 of the tax year:

• were widowed before January 1 of the tax year
• have a child/stepchild that you care for all year and can claim an exemption (there are some exceptions)
• have have kept the home, paying more than half the cost (ex. rent/mortgage, utilities, food, etc)

Note: You could file as married filed jointly if your spouse died during the tax year. After that you can file the next two years as a qualifying widow(er). According to the IRS, you can file with a Form 1040 or Form 1040A.

Married (Filing Separately)

You can be married filing separately if, as of December 31 of the tax year, you:

• are married
• can provide spouse’s name and social security number on the tax return

This may be an option if you only want to be responsible for your individual tax liability or if you spouse won’t agree to filing a joint tax return.

With this status you only have to report your income. If your spouses itemizes their deductions, you must as well, even if it is lower than the standard deduction.

Note: You can not claim earned income credit with married filing separately. According to the IRS, you can file with a Form 1040 or Form 1040A. In some cases, you may want to file as head of household, provided you meet the qualifications.

Married (Filing Jointly)

You can be married filing jointly if you, as of December 31:

• are married
• include your own and your spouse’s income
• both sign the tax tax return

Even if you have only one income, you can still file a joint return. Please know that both spouses are responsible for taxes due.

Head of Household

You can be considered head of household if you on December 31 of the tax year if you:

• are unmarried or consider unmarried, such as spending last 6 months apart from your spouse
• have have kept the home, paying more than half the cost (ex. rent/mortgage, utilities, food, etc)
• had a qualifying person living with you for more than half the year

The IRS has very specific guidelines on who is considered a qualifying person for tax purposes. You can get an earned income credit with the status.

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As you can see there are factors you need consider when choosing your filing status. Make sure you choose a status that is applicable and advantageous to you and your family.

Please be aware, I’ve done my best to ensure that the above listed amounts are current for tax year 2009, but you should always double-check to make sure that you’re working with valid information.

8)  W-4

If you’ve ever worked a job (for a reputable business, that is) then you’ve filled out a W-4.  You may not have known what you were doing, but you filled it out.  Here’s some info that should help you figure out how to make it work better (or at least more efficiently) for you.

You fill this out so your employer can withhold the correct federal income tax from your pay.  You’ll be asked if you are single or married and how many allowances you have.  If you’re single and don’t own a home, you’ll probably enter 1or 2.  Keep this in mind—the higher the number you write down on your W-2, the less is withheld.  While this sounds like a good thing up front, it could lead to you owing taxes at the end of the year.  I’m not going to tell you what to do, but hopefully the form makes a little more sense.

We’re hitting the home stretch.  Just two more–stay tuned tomorrow.  The last two are worth it!