Ankle-deep

It's still early in the process and the returns have started to trickle in. As soon as Fidelity and Schwab send the majority of their 1099s, the deluge will start.

Filing Status

I was asked a question yesterday and it occurred to me that all this talk about tax rules, deductions and credits was a little premature. Before any return can be prepared, the threshhold decision to make is what is the filing status.  For most people, especially single people, this is an easy question to answer. If you are single (with no children), your filing status is single. After that, it can get more complicated. If you are married, you can file a joint return with your spouse or you can file "married filing separately".  Most married people don't even think about this one. They simply file married-joint. 

Married - separate

There is an alternative. If you are legally married on December 31 (this is the critical date for this decision), you only have two filing choices - joint or separate.  The tax tables were constructed to discourage married couples from filing separately.  They reach a higher marginal tax rate at a much lower income level.  You also lose the benefit of several deductions and credits. There are, however, non-tax reasons people consider filing separately.  Couples considering divorce may want to separate their tax lives.  One spouse may not trust that the other spouse is being honest in reporting their income.  If you sign a joint return with your spouse, you become liable for their tax liability and their penalties if they get caught.  There is an "innocent spouse" rule, but the spouse truly has to be innocent.  There are actually cases, although they are in the vast minority, where, due to the relative income and deductions of each partner, the combined tax actually comes out lower by filing separately.

Head of household

This is the fourth filing status. It is available to a single (not married) person who provides a principal place of abode for a child or other dependent for at least half of the year.  If you are divorced with a minor child you probably qualify for this filing status. It is a more favorable status than filing single.

December 31

When determining filing status, this is the only day of the year that counts. It doesn't matter what happened on the previous 364 days.  If you are getting divorced, the divorce must be final under state law in the jurisdiction where you live.  One note to those who have tied the knot early in the year. Although they have done much to eliminate the marriage penalty, it woould be a good idea to review the amount of withholding you are having taken out of your paychecks to make sure you are being covered.