Certain life happenings, such as getting married, will prompt you to change your tax filing status.
While it may initially feel like a chore, it's usually a straightforward process. And depending on your circumstances, it may save you money come tax season.
Your filing status determines important factors, such as your tax rates and standard deduction, which is the amount of income that's not subject to federal income tax. Therefore, having the right filing status can help you get the biggest refund.
Changing your status is simple. "All you have to do is alter your filing status when you submit your tax return," says Marguerita Cheng, a certified financial planner, CEO and co-founder of Blue Ocean Global Wealth.
If you'd like to make changes to the amount of tax you're withholding per paycheck, you can submit a new W-4 to your employer. "You can do this throughout the year, not just when you file taxes," Cheng adds.
Before making the change, you must first determine your eligibility for the various filing statuses. For married persons with a living spouse, there are two ways to file:
- Married filing jointly (MFJ): To file jointly means you file a single return, which will include the income and deductions for both spouses.
- Married filing separately (MFS): Each person files their own return, keeping incomes and deductions separate.
Here's what experts have to say about filing jointly versus separately, plus advice on how to decide what's right for you.
Filing joint typically provides married couples with the most tax breaks.
Tax brackets for 2020 show that married couples filing jointly are only taxed 10% on their first $19,750 of taxable income, compared to those who file separately, who only receive this 10% rate on taxable income up to $9,875. After that, the rates continue to increase on a marginal basis.
Additionally, the IRS offers spouses who file jointly one of the biggest standard deductions each year, according to TurboTax. In 2019, the standard deduction for a married pair filing jointly is $24,400. Conversely, for those filing separately, the tax break is just $12,200, which is the same as for single people.
Another reason to consider filing together is that joint filers are often eligible to receive meaningful savings in the form of tax credits, such as:
- The Earned Income Tax Credit (EITC), which is designed to "benefit for working people with low to moderate income." Here's how to know if you and your spouse qualify, according to the IRS.
- The American Opportunity and Lifetime Learning Education Tax Credits, which reduces the amount of taxes owed by those who are attending college, or have a spouse or child with college or graduate school tuition costs.
- Reimbursement or refund for adoption expenses when legally adopting a child.
- The Child and Dependent Care Tax Credit, which can help offset your child-care costs if you are working and must pay a caregiver to look after your child (so long as they're younger than 13) or a disabled spouse.
As long as you were married by Dec. 31, 2019, you are eligible to file your taxes jointly, "regardless of whether you were married the entire year or not," explains Cristina Guglielmetti, a certified financial planner and founder of Future Perfect Planning.
While "it's almost always better to file jointly because of a lower tax responsibility overall," there are "very specific situations" when it pays to submit separate returns, Guglielmetti says.
Here are four situations where filing separately would be the better option:
1. You or your spouse have high or unpaid student loan debt: If one of you has defaulted on your student loans, meaning you haven't paid on them in 270 days or more, you should consider filing separately, explains Malik S. Lee, an Atlanta-based certified financial planner at Felton and Peel. That's because, in this case, your joint tax refund could end up being rerouted through the Treasury Offset Program and put toward the unpaid debt, meaning neither of you would get a refund. However, if you had filed separately, at least one of you would have a refund.
"If you have federal student loans and are on an income-driven plan, meaning the amount you pay on your loans each month is based on your salary, it might make sense to consider filing separately from your spouse. That way, their income is not considered in the repayment calculation," says Guglielmetti.
2. One of you has excessive medical bills: When you or your partner get sick, "you can generally deduct your medical expenses above a threshold of your income," says Guglielmetti.
In 2019, the IRS allows taxpayers to deduct qualified unreimbursed medical care expenses for the year that exceed 7.5% of your adjusted gross income (AGI).
If both you and your spouse earn an income and you file jointly, your medical expenses would have to be higher in order to be able to make any deductions. But if you file separately — so your tax return reflects just one or your salaries — "you will reach the threshold faster and be able to deduct more of those expenses earlier on," says Guglielmetti.
For example, if you and your spouse file jointly and earn a combined AGI of $100,000, you would have to rack up more than $7,500 in doctors bills before you could begin deducting any of these expenses. Conversely, if you chose to file separately with an AGI of $40,000, your medical bill total would only have to exceed $3,000, which is 7.5% of $40,000.
3. You're going to divorce: If you think you're going to separate from your spouse and want "to avoid liability with your spouse for taxes on their income," you should consider filing separately, says Edward Zollars, a Phoenix, Arizona-based certified public accountant (CPA).
When filing jointly, "each spouse is responsible for the entire tax due," adds Guglielmetti. "So, even if your other finances are separate, if you file jointly and your spouse doesn't pay (or commits tax fraud), you're responsible. Filing separately keeps those responsibilities separate, and you're only responsible for your own."
4. If you would save more on your taxes by filing separately: This may seem like a no brainer, but if you run the numbers and filing separately would save you more money, then you should probably go that route.
To find out which status would benefit you the most, "you can run a side-by-side comparison — or have your tax preparer run it for you — with the outcomes of each filing status," Guglielmetti says. "You are allowed to choose the status that most benefits you, and you can choose a different status each year by making the same assessment each time."
If you're still unsure of which status makes the most sense for you, you should "consider getting expert tax advice from a CPA or Enrolled Agent," which is a federally-licensed tax practitioner, says Kaleb Paddock, a certified financial planner at Ten Talents Financial Planning. "This could be key to understanding what you should do or whether you should change your status since there are many variables in this decision."
Like this story? Subscribe to CNBC Make It on YouTube!