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Filing Status Definitions


photo by Brent Alex

photo by Brent Alex

Single: unmarried, divorced, RDP, or legally separated (according to state law)

Married Filing Jointly: married couple filing together, even if only one spouse had income during the tax year

Married Filing Separately: a married couple choosing to file their own returns; may minimize tax liability over MFJ

Head of Household: unmarried, having maintained a principal residence for self and a qualifying dependent

Qualifying Widow(er) with Dependent Child: generally, the surviving unmarried spouse (when spouse died within the prior two tax years) with dependent child(ren) who also maintains a principal residence

 

If married, divorced, or legally separated at any time during the year, the new arrangement is considered for tax purposes as having been true for the entire year. 

Also, a widow(er) may file as married filing jointly in the tax year of the death of their spouse. 

Avoiding Penalties & Interest: Estimated Tax & Other Withholding


photo by Brent Alex

photo by Brent Alex

A common question we receive relates to interest and penalties, and specifically on how to avoid them. Interest and penalties can be assessed even if the taxpayer is to receive a refund. Thankfully, the IRS has established "safe harbor" rules that ensure that, as long as the full tax liability is timely paid, interest and penalties will not be issued on the Federal level. If a taxpayer has been penalized, they should consult their CPA, being sure to mention the first-time abatement penalty waiver (FTA). If funds are unavailable, other options include an installment agreement or an offer-in-compromise. 

The options to avoid interest and penalties are:

Withhold at least 100% of the prior tax year's tax liability in the current tax year;

Withhold at least 90% of the current tax year's tax liability in the current year;

or Have an ending/unpaid tax liability in the current year of less than $1,000

 

If considered a "high earner", defined as having AGI above $150,000 ($75,000 if MFS), the first rule above is changed to 110% of the prior year's tax liability in the current tax year. The other two points are unchanged. Farmers and fisherman change the 90% rule above to 66.67%, and are also subject to the "high earner" rule. 

 

Taxpayers may be exempt from withholding if they have no tax liability in the current tax year, and they expect to have no tax liability in the next tax year. Exemptions are issued for one year only, although they may be renewed. Note that exemption relates to income tax only, with Social Security/Medicare tax paid as wages are incurred. Exemption, along with withholding, is completed on the Form W-4, which can be adjusted during the tax year.  

 

Estimated taxes are paid when income tax withholding will be or is insufficient. Payment dates are as follows, subject to the regular weekend/holiday convention:

Jan 1-Mar 31: due April 15

Apr 1-May 31: due June 15

Jun 1-Aug 31: due Sept 15

Sep 1-Dec 31: due Jan 15 of following year

Qualifying Relative Rule


photo by Brent Alex

photo by Brent Alex

Although dependents claimed on the tax return may be a qualifying child (see our related post) or a qualifying relative, certain credits and deductions may be taken for qualifying children only (e.g. the Child Tax Credit).

 A qualifying relative is a person that meets ALL of the following conditions:

Is not a qualifying child for any taxpayer

Has gross income of under $3,900 for the year

Has at least half of their support provided by the taxpayer

Is a relative of the taxpayer (see below) or lives with the taxpayer the entire year

Does not file a joint tax return

Is a US citizen/resident/national, or is a resident of Canada/Mexico

 

A relative of the taxpayer that is allowed to not live with the taxpayer but may be claimed as a dependent include:

Child, stepchild, foster child, or a descendant of such

Brother or sister, including half- and step-brothers/sisters

Father or mother, or an ancestor of such (but not a foster parent)

Step-father or mother

Son or daughter of a brother or sister, or half-brother/sister

Brother or sister of a father or mother

In-laws: son, daughter, father, mother, brother, sister

 

Persons claimed are considered to have passed the 'living with' test if the absence is due to illness, education, business, vacation, or military service. 

Exemptions are subject to phaseout above certain income levels (see our related post). 

Social Security Taxes


photo by Brent Alex

photo by Brent Alex

Many taxpayers are not aware that since 1983, up to 85% of social security received can indeed be taxable.

 

The level of benefits that are taxable is based on 'combined income', which is the sum of AGI, tax-exempt interest (e.g. muni bond interest), one-half of social security benefits received, and foreign-earned income. If the 'combined income' is between $32,000 and $44,000 for a couple filing jointly, up to 50% of social security is taxable. If MFJ with 'combined income' over $44,000, up to 85% of benefits are taxable. Most all other filing statuses see 50% taxable between $25,000 and $34,000, and 85% over $34,000. 

 

States may also tax social security benefits: 

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