Deep Dives

Tax Filing Basics

Ever wish you could reap the benefits of taxes, but not actually have to file them? Um, me too. Like, every year. But being more familiar with the facets of filing taxes can make the beast much less scary.

July 11, 2022

Ever wish you could reap the benefits of taxes, but not actually have to file them? Um, me too. Like, every year. But being more familiar with the facets of filing taxes can make the beast much less scary. Did you know the filing status you choose can make a big difference in the amount of income tax you pay? Also, being aware of what deductions from your taxable income are allowed can help you to reduce your income tax liability. We’ll give you the lay of the land of tax filing basics to help you start navigating your taxes.

How many different filing statuses are there?

Federal Tax Filing Status

If you’re single, there are three statuses you can choose from: single, head of household, and qualifying widow(er). If you’re married you can choose to file jointly or separately. Each status has its own tax bracket with rates ranging from 10% to 37% (for 2020 and 2021).

Single

Who: unmarried individuals who don’t fall into another filing category

Why: You could possibly pay less in income taxes if you make a lot of money. At the higher end of the tax bracket, a “marriage penalty” exists, meaning at higher incomes, a married couple advances through tax rates faster than a single person. One example of the penalty is in the highest bracket (2020), a single person pays 37% on income over $518,400, but a married couple pays 37% on income over $622,051 (way less that 2 x $518,400).

Single Filer Tax Brackets in 2020 and 2021

Head of Household:

Who: unmarried individuals who have paid more than half the cost of keeping up a home for yourself and a qualifying person. The qualifying person could be a dependent child, grandchild, brother, sister, grandparent, or anyone else you can claim as an exemption and must live with you for more than half the year. The criteria for this status are pretty stringent. In the words of the IRS: “Don’t choose this status by mistake. Be sure to check all the rules.”

Why: This status allows bigger tax breaks. For instance, if you make $50,000 and you file single, you’re in the 22% tax bracket. But that income filing as head of household lands you in the 12% bracket.

Head of Household Tax Brackets in 2020 and 2021

Qualifying Widow(er)

Who: an individual who has lost a spouse recently and has a dependent child. The surviving spouse files married-filing-jointly in the year the spouse was deceased, and can file as qualifying widow(er) for the next two tax years. The surviving spouse cannot remarry, must have paid more than half of the cost of maintaining the home and the dependent child must live with the surviving spouse for the full year.

Why: The bracket for qualifying widow(er)s is the same as married-filing-jointly. This allows the individual a higher standard deduction and the tax bracket is more beneficial.

Married Filing Jointly

Who: married couples who have wed before the end of the tax year. If you get divorced before the end of the year, you’re divorced for the entire year in the eyes of the IRS.

Why: You will probably save on taxes if you file jointly rather than separately, especially if one spouse earns more than the other. The more unequal two people's incomes are, the greater the benefit to using married-filing-jointly, where some of the higher income is pulled into a lower bracket. The standard deduction for this status is higher if you don’t itemize. There are some deductions and credits that apply if you file jointly, but don’t qualify if you file separately.

Married Filing Jointly/Qualifying Widow(er) Tax Brackets in 2020 and 2021

Married Filing Separately

Who: same as married-filing-jointly

Why: Filing separately is not the same as filing single. If both spouses are high earners, filing separately might result in a lower overall tax bill as they are more likely to run into the “marriage penalty” if filing jointly. According to NerdWallet, however, the following that could be disadvantages of filing separately:

  • You can’t deduct student loan interest.
  • You can’t take the credit for child and dependent care expenses. Also, the amount you can exclude from income if your employer has a dependent care assistance program is half what it is if you file jointly.
  • You can’t take the earned income tax credit.
  • You can’t take exclusions or credits for adoption expenses in most cases.
  • You can’t take the American Opportunity or Lifetime Learning credit.
  • You can take only half the standard deduction, child tax credit or deduction for retirement savings contributions.
  • You can deduct only $1,500 of capital losses instead of $3,000.
  • If your spouse itemizes, you have to itemize too, and you’ll also have to decide which spouse gets each deduction.
Married Filing Separately Tax Brackets in 2020 and 2021

How Tax Brackets Work

Just because your gross income puts you in a certain bracket doesn’t mean you pay that rate on your entire income. Because our tax system is tiered, people with higher taxable incomes are subject to higher federal income tax rates, and people with lower taxable incomes are subject to lower federal income tax rates. The government decides how much tax you owe by dividing your taxable income into portions. Each portion is taxed at the corresponding tax rate. The great part about this is that no matter which bracket you’re in, you won’t pay that tax rate on your entire income.

Example: Let’s say you’re single with $54,000 in taxable income in 2020. That puts you in the 22% tax bracket. But, instead of paying 22% on the entire amount, you pay 10% on the first $9,875, 12% on the amount between $9,876 and $40,125, and 22% on the rest. So your total tax bill would be roughly $7,668. If you divide the amount of tax you pay by your taxable income, in this case 14.2%, this gives you your effective tax rate.

Standard Deduction

We’ve referred to something called the “standard deduction” throughout this article. What’s that, you say? The standard deduction is the amount the IRS allows you to subtract from your income thus reducing your taxable income.

Standard Deduction Amounts in 2020 and 2021

You can choose either the standard deduction or itemized deductions. If you don’t keep track of your qualifying expenses or your deductions are less than the standard deduction, you would take the standard deduction.

Itemized Deductions

Itemized deductions are expenses for eligible contributions, products and services that you can subtract from your income to lower your tax liability. Common deductions are charitable contributions, mortgage interest, property taxes, and medical expenses. The limitations on deductions vary each year, so check with the IRS to see what is allowed.

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