How much you pay — and legally owe — in taxes is partially determined by your filing status.
There are three filing statuses for non-married taxpayers — single, head of household, and qualifying widow(er). Married taxpayers can either file taxes jointly or separately.
Each filing status has its own tax brackets (married filing jointly and qualifying widow(er) use the same tax table); these represent the rates at which the individual or couple's income is taxed as they reach certain thresholds. The seven tax rates range from 10% to 37%.
Because America has a progressive tax system, the amount of taxes owed by someone steadily increases as that person's income increases. It's not a monumental change when people jump from one tax bracket to another.
Still, choosing the right filing status for your tax situation is crucial. It helps you qualify for certain deductions and credits, and determine your standard deduction amount and correct tax liability.
When you start a new job, you'll fill out a W-4 and select a filing status to let your employer know how much money to withhold from each paycheck for taxes. And when it comes time to file your tax return, you choose a filing status again to ensure the amount of taxes you paid and the amount you owe are the same.
RELATED: Take a look at some of the biggest tax deductions for the self-employed:
Top 15 tax deductions for the self-employed
Top 15 tax deductions for the self-employed
1. Self-Employment Tax Deduction – Unfortunately, in the eyes of the IRS, you are both an employer and an employee. Thus, you are responsible for both the employer and employee tax contributions to Medicare and Social Security. Fortunately, 50% of your employment tax payment (effectively your "employer" contribution) is tax deductible.
2. Qualified Business Income (QBI) Deduction – To level the playing field of corporate tax breaks, self-employed taxpayers now have a new deduction that assists small businesses with pass-through income (where individual tax rates apply). Sole proprietorships, partnerships, or S corporations may deduct up to 20% of QBI – although limitations can apply and some term definitions in the code are unclear. This deduction took effect from January 1, 2018, so you will be able to claim it for the first time on your return you file this spring for the 2018 tax year.
3. Home Office Deduction – You can still deduct a home office as long as it is your principal place of business, used on a regular basis, and used for nothing other than business. IRS Publication 587, "Business Use of Your Home" gives details on eligibility and how to calculate your deduction.
4. Retirement Plans – If you use a 401(k), a simplified employee pension (SEP), or some other suitable qualified retirement plan, you can deduct your contributions to that plan. Not only will you score valuable tax deductions, you will also save responsibly for retirement by growing a tax-deferred nest egg. The IRS provides details on calculating contributions and deductions based on your choice of plan.
5. Office Supplies – As long as office supplies (non-capital expenses) are purchased and used only for your business, they may be considered as standard business expenses and deducted.
6. Depreciation – Capital expenses (that have a lifespan greater than one year) may also be deducted through depreciation if they are used to generate income for your business. Depreciation may apply to equipment used for both home and business. For details, see IRS Publication 946, "How to Depreciate Property".
The new tax law raised the depreciation limit to $1 million and the depreciation rate from 50% to 100% on equipment bought and placed into service after September 27, 2017.
7. Educational Expenses – Do you attend seminars related to your business? Do you take continuing education classes or maintain subscriptions and dues in relevant professional societies? If these expenses relate to your profession, they may be deducted.
8. Health Insurance – Health insurance is frequently challenging for the self-employed. You may be able to reduce the burden by deducting premiums for you and your family if you meet the criteria outlined in IRS Publication 535, "Business Expenses."
Note: The new tax law eliminates the penalty for not having health insurance (aka the "Obamacare mandate") from 2019 onwards – but health insurance was still required for tax year 2018, for which you are filing a return this season. Although there is no penalty going forward, we don't recommend forgoing healthcare insurance as a cost-savings exercise.
9. Communication Expenses – Expenses such as Internet and data services may be deducted in whatever proportion relates to your business. Basic local telephone services are not deductible for the first phone line in your home, even if you have a home office. Long-distance business calls on that line are deductible, as are the costs of a separate line used exclusively for business.
10. Other Travel Expenses – Some business travel expenses may be 100% deductible if they occur away from your tax home and are considered "ordinary and necessary". The new tax law has eliminated certain entertainment expenses, but the 50% deduction on food and beverage expenses still applies.
11. Promotional Expenses – Business-related advertising costs from full media promotions all the way down to simple business cards are deductible. Promotional gifts may be deductible as long as they are branded to your business.
12. Bank Fees – If you are careful to separate your business bank account from your personal accounts and maintain a clear line between transactions, you may be able to deduct some bank fees related to your business account.
13. Business-Related Interest Charges – Similarly to bank fees, interest on credit card balances and loans that are strictly related to your business may be deducted. Be sure to keep excellent and thorough records to prove the distinction. The new tax law creates limitations on interest deductions for larger businesses (gross receipts greater than $25 million), but, as a small business, your interest deductions should be unaffected.
14. Mileage – Do you use your car for business purposes? You can either take a standard mileage deduction (54.5 cents per business-related mile for tax year 2018 and 58 cents per mile for 2019) or take a deduction based on actual costs such as fuel, maintenance, licensing, and depreciation. Some public transportation expenses may also be deducted. Be sure to keep the personal and business-related mileage expenses separate, retain all necessary receipts, and keep good records as proof of business use. (See the pattern here?)
15. Contract Labor Costs – You may employ other independent contractors on a contract basis to provide services – for example, contracting with a web developer to create your website. Those expenses are generally deductible. You may also deduct the cost of tax preparation services used for the business-related part of your return.
Discover More Like This
BACK TO SLIDE
What is my filing status?
Below are the guidelines for choosing a tax filing status. If you're still unsure, the IRS also offers a handy questionnaire that takes about five minutes to fill out.
Non-married taxpayers who are not claimed as a dependent on another person's return should file as single. If you were previously married and your divorce was finalized before the last day of the year, you'll file as single.
Single taxpayers are eligible for a standard deduction of $12,200 for the 2019 tax year and $12,400 for the 2020 tax year.
Married filing jointly (MFJ)
Couples who were married by December 31 of the previous year are eligible to file a joint return. In general, there are a few major benefits to married filing jointly, including access to valuable tax credits, a larger standard deduction, a larger capital loss deduction, and combined incomes, potentially bringing a higher earner into a lower tax bracket.
The standard deduction for MFJ is $24,400 for the 2019 tax year and $24,800 for the 2020 tax year.
Married filing separately (MFS)
Married filers can file separate tax returns where they report only their own income, deductions, and credits. But they're still connected in some ways. For instance, if one spouse itemizes deductions, the other must, too.
Tax law imposes some other notable limitations on married couples who file separately. They are excluded from the earned income credit, dependent care credit, education-related credits, and the student-loan interest deduction. Also, the income threshold for the highest tax rate is lower for MFS than for MFJ and single filers.
The standard deduction for MFS is the same as for single filers: $12,200 for the 2019 tax year and $12,400 for the 2020 tax year.
Head of household
Non-married individuals may choose to file as head of household if they have a qualifying child or dependent. This includes a grandchild, stepchild, foster child, adopted child, sister, brother, step sibling, and under special circumstances, a parent, niece, nephew, aunt, uncle, or in-law.
The taxpayer must cover more than half of the costs of running the household where the qualifying child or dependent resided for at least half of the year.
Taxpayers "considered unmarried" may also file as head of household if their spouse lived away from the home for the last six months of the year and they covered the majority of household costs where their dependent resides.
A person who files as head of household may claim a standard deduction of $18,350.
An individual whose spouse dies is still able to file jointly for that tax year if they do not remarry. Then, in the two years following, they are entitled to file as a qualifying widow or widower as long as they claim a dependent child, stepchild, or adopted child.
For example, if a man died in 2019 and left behind a wife and two young children, the woman can still file jointly this tax season. For tax years 2020 and 2021, she'll be eligible to file as a qualifying widow, which retains the same benefits of the married filing jointly status.
The standard deduction is the same as for MFJ: $24,400 for the 2019 tax year and $24,800 for the 2020 tax year.
You can maximize your tax refund in several ways — from paying off high-interest debt to investing in a business or saving for retirement. One or more of these options could be the perfect fit for you.
The Schedule K-1 is slightly different depending on whether it comes from a trust, partnership or S corporation. Find out how to use this tax form to accurately report your information on your tax return.