Tuesday, December 30, 2008

Who wants to be a basic tax law expert: Round 2

Are you married in the eyes of the IRS?

The answer is not always straightforward.

Once again, for the Ward & June Cleaver Leave it to Beaver scenario family, the answer is probably easy--it's a virtual certainty that Ward & June would qualify as "Married" and would have the option to file either Married Filing Jointly (MFJ) or Married Filing Separately (MFS). Most likely, they filed MFJ, since almost all married taxpayers minimize their total tax bill by doing so.

But Ward & June are not typical of families these days, and the answer can be more complicated in the case of spouses who did not live together during the second half of the tax year.

If a taxpayer is still legally married but not on speaking terms with her spouse or may not even know where to find her spouse, MFJ may not be a practical option even though they legally qualify, but MFS can be a disaster from a tax standpoint. (MFS is generally a terrible filing status for most of our VITA site clients, since MFS disqualifies the taxpayer from many important tax benefits such as the Earned Income Tax Credit and education tax credits, and reduces the amount of other tax benefits as well.)

Under some circumstances, you might be able to save the day for the taxpayer if you can correctly determine that the taxpayer qualifies for Head of Household status, but the rules are complex and you need to be very careful in navigating them correctly.

So, now is a good time for another round of Who wants to be a basic tax law expert?

In round 1, you explored the most common source of errors on basic returns, the rules for claiming dependents. Now, in round 2, you'll cover another very frequent cause of mistakes on basic returns, the rules for determining a taxpayer's filing status, that is, whether the taxpayer is eligible to file as single, married filing jointly (MFJ), married filing separately (MFS), head of household (HoH), or qualifying widow(er).

The most useful resource in answering these questions is Tab B of your Pub 4012 Volunteer Resource Guide. (Click on this link to go to a PDF version of the tab with my annotations and highlighting. REMINDER: Hover your mouse pointer over the red arrows in the PDF's to see the text of my annotations.)

Then go to this link to see how much you know (or can figure out) about the kind of tricky filing status questions that come up at VITA sites like ours.

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