What are my Filing Status options?

Following are definitions of each filing status and some general rules:

Single - You fall in the "singles" category if you aren’t married at year-end and don’t qualify to use the lower surviving-spouse or head-of-household rates.

Married Filing a Joint Return - If you are married on the last day of the year, you can file a joint return. This applies even if you are separated from your spouse and pursuing a divorce. Unless the divorce is final by the end of the year, the IRS considers you married, and you can’t file a return as a single taxpayer. If you were married for any part of the year but were widowed at year-end you file a joint return for yourself and your deceased spouse.

Surviving Spouse - For up to two years after the year in which your spouse dies you may be able to continue using the joint-return rates rather than moving immediately into higher brackets. Not every widow and widower qualifies, though. Most, in fact, do not.

• To be a qualifying surviving spouse - sometimes called a qualified widow or widower - you must meet four tests:
  • You must have been eligible to file a joint return for the year your spouse died.
  • You must not have remarried. (But if you did, you can use the joint-return rates by filing with your new spouse.)
  • You must have a child, stepchild or foster child who qualifies as your dependent.
  • You must have paid more than half the cost of maintaining your home, which is the principal residence of the child for the entire year (except for temporary absences).

Head of Household - This category causes a lot confusion, particularly among young people starting out on their own. Generally, head-of-household status is used by divorced women with small children at home. But it can also pay off for divorced or widowed parents whose grown children return to the nest after college or following a divorce. To earn the head-of-household title and the right to use the lower-than-single tax rates, you basically have to be providing a home for a child or other relative. To qualify:

• You must be unmarried at the end of the year. (Even if you’re legally married at year-end you can pass this test under a special "abandoned spouse" rule if your spouse didn’t live with you during the last six months of the year.)
  
• You must pay more than half the cost of keeping up the principal home for yourself and a child or other relative you can claim as a dependent. If the child (including a grandchild, stepchild or adopted child) is unmarried, he or she doesn’t have to qualify as your dependent to earn you head-of-household status. Any other relative living with you, however, must pass the dependency tests.
  
• Since the dependency test doesn’t apply when single children are involved, you can claim this tax-saving status regardless of how much money the boomerang child makes — as long as you meet the other tests.
  
• In most cases, you and the child or other relative must share the same house for more than six months of the year. There is an exception, however, if you are paying more than half the cost of maintaining a home for your dependent mother or father for the entire year. In that case, he or she does not have to live with you for you to qualify for head-of-household tax status. If you are paying more than half the cost of a nursing home for your dependent parent, for example, you can qualify. When figuring whether you pay more than half the cost of maintaining a home, count such expenses as rent or mortgage interest, taxes, insurance on the home, repairs, utilities, domestic help and food eaten at home. Don’t count the cost of clothing, education, medical treatment, vacations, life insurance or transportation.
  
• Note: If you qualify as a surviving spouse, you may be able to meet the head-of-household test once your two-year use of the joint rates runs out. Head-of-household rates are lower than those that apply to singles.

Married Filing Separately - This filing status almost never makes sense. The rare circumstances in which it can pay off usually involve a husband and wife with similar incomes who by splitting the income on separate returns can claim deductions that would elude them on a joint return. One often-cited reason for filing separate returns, for example, is if one spouse has significant medical bills. Such expenses are deductible only to the extent that they exceed 7.5% of adjusted gross income. Splitting income on separate returns might squeeze out a bigger medical deduction for one spouse, but only in very special circumstances would the tax savings offset the cost of skipping the advantages that come by filing a joint return. There are many factors to consider, some costly, before filing separately:

• One spouse can’t claim the standard deduction if the other itemizes. If one itemizes, both must.
  
• On separate returns, you can’t claim the child-care credit.
  
• The $25,000 passive-loss allowance for active rental real estate investors, is not allowed on separate returns.