A chess board and a checkers board are identical. Both are made up of 64 tessellated squares that alternate between two colors. You can use the same board for either game. Other than the similarity of the game board, however, the two games are very different. They are governed by different rules that control how the pieces move and where they can go. While the rules of the game are usually unseen during play, their existence is continuously felt and the entire outcome of the game is based on them.
In a tax return a similar scenario exists. There are two components of the return that act as an ever-present influence over the remaining rules that govern the tax formula. The first component is the determination of who qualifies as a “dependent” of a taxpayer. The second governing component is for what filing status a taxpayer qualifies. These two determinations will exert their influence throughout the tax formula, much like the rules of a game or an unseen director managing a play from behind the curtain. They have a significant and continuous effect on the final outcome of the tax return, determining the deductions, credits, exemptions, taxable income, and tax tables that you will use for your return.
Whether you can claim an individual as a dependent on your tax return has a far-reaching effect on the amount of tax you will pay. The qualification of a dependent can change your deductions and credits. It will determine the number of exemptions that you can claim. It can even affect the filing status that you claim. There is no portion of the tax return (other than income) that is not influenced by the claiming of a dependent.
For the most part, whether or not you can claim a person as a dependent is determined by the rules that govern the dependency exemption. Even when considering a deduction or a credit, whether or not a person qualifies as a dependent will be based on the exemption rules. For that reason we will focus on the dependency exemption.
As a reminder, exemptions are a specific amount of income that is exempt (or free) from tax. This dollar amount is a fixed number that changes every year, based on inflation. The exemption is subtracted from a taxpayer’s income in addition to other deductions, in order to arrive at “taxable income.” Each taxpayer is generally allowed one exemption for him- or herself (assuming the taxpayer is not another person’s dependent), one for his or her spouse (if married), and an additional exemption for each person who qualifies as his or her dependent. As an example, if a married couple has one dependent child they would be allowed to claim three exemptions (one for each spouse and one more for the child). If the exemption amount for a particular year were $4,000, that couple would be allowed to claim $12,000 in exemptions (3 exemptions x $4,000 per exemption = $12,000). Thus, $12,000 of their income would be free of tax.
There are three classifications of individuals who can qualify as a dependent, each with its own set of rules. The three classifications are:
In order to be a Qualifying Child, the individual must meet the following requirements:
Note A child born any time during the year qualifies as having lived with the taxpayer during the entire year, even if born on December 31st.)
In order to be a Qualifying Relative, the individual must meet the following requirements:
Note In the case of a divorced couple, the parent who has actual custody of a child for more than half of the year will generally be the one to claim the exemption. This is determined by the amount of time that the parent has the child, not by the divorce decree. It does not matter whether the parent provided more than half of the child’s support. If the parents have exactly equal custody, the parent with the higher AGI will receive the exemption.
In order to be a Qualifying Non-Relative, the individual must meet all of the requirements for a Qualifying Relative, except:
If a person qualifies as your dependent, it will be a great benefit to you in the final result of the taxes you will owe. If you have a person who is not clearly a dependent, but could possibly be one, it is worth spending the time to understand what rules need to be met so that he or she qualifies.
While the declaration of your filing status is a simple check-box at the beginning of your tax return, it has far-reaching effects into several key parts of the tax formula. Your filing status governs the limits of eligibility for many above-the-line deductions and credits. It determines the point at which Social Security income is taxed. Your filing status also determines the dollar value of the Standard Deduction that you are allowed to claim. Finally, your filing status also determines which set of tax brackets (or tables) you are subject to, which in turn determines your tax, and can dramatically affect the amount of tax you will owe.
There are four sets of tax tables. Two of these tables apply to married individuals and two apply (generally) to singles. The main reason for the differences in filing status is to reduce the penalty that would be assessed on a married couple for combining their income, and to attempt to reflect the reality of combined expenses with that combined income.
Example Cynthia and Robert each earn $45,000 per year in their respective jobs. As unmarried individuals, this income (minus the standard deduction and exemption) would place them in the 15% marginal tax bracket. However, if Cynthia and Robert married each other and there were not in an alternate tax bracket, their combined income of $90,000 would subject a significant portion of their income to the 25% tax bracket. The various tax brackets that relate to differing filing statuses are an effort to minimize such a discriminating penalty against a couple who is married over one who is not. (However, the marriage penalty still exists in many instances—just not to the degree that it would if there were not separate filing statuses.)
Each of the four tables corresponds to a particular filing status. There is one additional filing status that is intended to ease the transition from married to single for those whose spouse has died but who still care for a dependent. This final filing status allows a single widow(er) to use the tax tables of married couples for two years.
The filing status that you select will have an effect on several parts of your tax formula. It will determine how much you can claim for various deductions and credits, as well as your effective tax rate. While each one of the five statuses is governed by strict rules that you must meet in order to claim a particular status, it is good to understand those rules and the implications of each status, because if you meet the qualifications of more than one filing status, you may choose which one to use. The following is a list of the five filing status options:
Your marital status is determined on the last day of the year. Even if you get married on December 31st, you are considered married for the entire year for tax purposes. The same is true if a divorce becomes final on the last day of the year—the individuals are considered single for the entire year. The following is an explanation of the qualifications that determine which filing status applies to you:
Under most circumstances, the only time it is better to file separately is if one spouse believes that the other is not being honest with his or her tax return or if one spouse owes a lot of money that the IRS is trying to collect and the other is due a refund. In addition, it may also be a good choice to use the MFS status if spouses are truly separated. On rare occasions the MFS status can result in lower taxes for a couple, so to be safe you could try running the numbers both ways, but it will take significantly longer to do (and cost more if you use a tax preparer), with little chance of a better result.
In order to qualify for the QW status, though, the surviving spouse must also maintain a household that is the principal residence for a dependent son, daughter or stepchild by blood or adoption (and qualify to claim the exemption for that child).
When the game board is placed before you, a choice to play chess or checkers must be made. When a significant amount of your money is on the line, you would be wise to choose the game whose rules favor your skills the best. Once you choose the game, the rules govern from that point forward.
In this same way, once a filing status is chosen and dependents are determined, the rules governing these components will take over and govern everything else that happens in your personal tax return. It would be wise to understand the implications of those rules, in order to put yourself in the best possible position for the game.