J. K. Lasser's Your Income Tax 2010 (Paperback)

Chapter One

1.1 Which Filing Status Should You Use? 10 1.2 Tax Rates Based on Filing Status 10 1.3 Filing Separately Instead of Jointly 11 1.4 Filing a Joint Return 13 1.5 Nonresident Alien Spouse 14 1.6 Community Property Rules 14 1.7 Innocent Spouse Rules 16 1.8 Separate Liability Election for Former Spouses 17 1.9 Equitable Relief 20 1.10 Death of Your Spouse in 2009 21 1.11 Qualifying Widow(er) Status If Your Spouse Died in 2008 or 2007 22 1.12 Qualifying as Head of Household 22 1.13 Filing for Your Child 24 1.14 Return for Deceased 25 1.15 Return for an Incompetent Person 26 1.16 How a Nonresident Alien Is Taxed 27 1.17 How a Resident Alien Is Taxed 27 1.18 Who Is a Resident Alien? 27 1.19 When an Alien Leaves the United States 30 1.20 Expatriation Tax 30

The filing status you use when you file your return determines the tax rates that will apply (1.2) to your taxable income. Filing status also determines the standard deduction you may claim (13.1) if you do not itemize deductions and your ability to claim certain other deductions, credits, and exclusions.

This chapter explains the five different filing statuses: single, married filing jointly, married filing separately, head of household, and qualifying widow(er). If you are married, filing a joint return is generally advantageous, but there are exceptions discussed in 1.3. If you are unmarried and are supporting a child who lives with you, you may qualify as a head of household (1.12), which will enable you to use more favorable tax rates than those allowed for single taxpayers. If you were widowed in either 2008 or 2007 and in 2009 a dependent child lived with you, you may be able to file as a qualifying widow(er) for 2009, which allows you to use joint return rates (1.11).

Special filing situations, such as for children, nonresident aliens, and deceased individuals, are also discussed in this chapter.

Your personal or family status also determines the number of personal exemptions you may claim on your return. For 2009, each personal exemption you claim is the equivalent of a $3,650 deduction (21.1).

Importance of Filing Status

1.1 Which Filing Status Should You Use?

Your filing status generally depends on whether you are married at the end of the year, and, if unmarried, whether you maintain a household for a qualifying dependent. The five filing statuses are: single, married filing jointly, married filing separately, head of household, and qualifying widow or widower.

If you are married at the end of the year, you may file jointly (1.4) or separately (1.3). If you lived apart from your spouse for the last half of 2009 and your child lived with you, you may qualify as an "unmarried" head of household (1.12), which allows you to apply more favorable tax rates than you could as a married person filing separately.

If you are unmarried at the end of the year, your filing status is single unless you meet the tests for a head of household or qualifying widow(er). Generally, you are a head of household (1.12) if you pay more than 50% of the household costs for a dependent child or relative who lives with you, or a dependent parent, whether or not he or she lives with you. You generally are a qualifying widow(er) (1.11) if you were widowed in 2007 or 2008 and in 2009 you pay more than 50% of the household costs for you and your dependent child. The tax rates for heads of household and for qualifying widow(er)s are more favorable than those for single taxpayers (1.2).

The filing status you use determines the tax rates that apply to your taxable income (1.2), as well as the standard deduction you may claim (13.1) if you do not itemize deductions. Certain other deductions, credits, or exclusions are also affected by filing status. For example, if you are married, certain tax benefits are only allowed if you file jointly, but more deductions overall may be allowed in certain cases if you file separately (1.3). The deduction for personal exemptions is phased out (21.12) for high income taxpayers at levels based upon filing status.

Marital status determined at the end of the year. For federal tax purposes, a marriage means only a legal union between a man and a woman as husband and wife.

If you are divorced during the year under a final decree of divorce or separate maintenance, you are treated as unmarried for that whole year, assuming you have not remarried before the end of the year. For the year of the divorce, file as a single person unless you care for a child or parent and qualify as a head of household (1.12).

If at the end of the year you are living apart from your spouse, or you are separated under a provisional decree that has not yet been finalized, you are not considered divorced. If you care for a child and meet the other head of household tests (1.12), you may file as an unmarried head of household. Otherwise, you must file a joint return or as a married person filing separately.

If at the end of the year you live together in a common law marriage that is recognized by the law of the state in which you live or the state where the marriage began, you are treated as married. If your spouse dies during the year, you are treated as married for that entire year and may file a joint return for you and your deceased spouse, assuming you have not remarried before year''s end (1.10).

1.2 Tax Rates Based on Filing Status

The most favorable tax brackets apply to married persons filing jointly and qualifying widow(er)s (1.11), who also use the joint return rates. The least favorable brackets are those for married persons filing separately, but filing separately is still advisable for married couples in certain situations (1.3). See Table 1-1 for a comparison of the 2009 tax rate brackets.

If you have children and are unmarried at the end of the year, do not assume that your filing status is single. If your child lives with you in a home you maintain, you generally may file as a head of household (1.12), which allows you to use more favorable tax rates than a single person. If you were widowed in either of the two prior years and maintain a household for your dependent child, you generally may file as a qualified widow(er), which allows you to use favorable joint return rates (1.11).

If you are married at the end of the year but for the second half of the year you lived with your child apart from your spouse, and you and your spouse agree not to file jointly, you may use head of household tax rates, which are more favorable than those for married persons filing separately.

What is your top tax bracket and effective tax rate? Your top marginal tax rate for 2009 is 10%, 15%, 25%, 28%, 33%, or 35%, depending on your taxable income (22.1). The rate brackets for 2009 are shown in Table 1-1. If your top bracket is 25%, for example, this means that each additional dollar of ordinary income (such as salary or interest income) will be taxed at 25% for regular income tax purposes. However, because the rate brackets are graduated, your effective tax rate may be significantly lower than your top (marginal) rate. For example, if in 2009 you are single with taxable income of $35,100, all of which is ordinary income, your marginal rate is 25%, but the first $8,350 is taxed at 10%, the next $25,600 ($33,950 - $8,350) is taxed at 15%, and only the last $1,150 ($35,100 - $33,950) is taxed at 25%. The total tax is $4,963, which represents an "effective rate" of 14.14% ($4,963/$35,100 taxable income), reflecting the fact that most of your taxable income is taxed in the 10% and (especially) the 15% brackets.

The tax rate on qualified dividends (4.2) and net capital gains (5.3) is generally lower than your top bracket rate on ordinary income. Qualified dividends and net capital gains are generally subject to a maximum 15% tax rate, but for taxpayers whose top rate bracket for 2009 (Table 1-1) is 10% or 15%, there is no tax; the rate on qualified dividends and net capital gains is zero (0%). For 28% rate gains or unrecaptured Section 1250 gains (5.3), the zero and 15% rates do not apply, but the rate cannot exceed 25% for unrecaptured Section 1250 gains or 28% for 28% rate gains.

To actually compute your 2009 regular income tax, you will either look up your tax in the Tax Table, use the Tax Computation Worksheet, or, if you have net capital gains or qualified dividends, use the Qualified Dividends and Capital Gain Tax Worksheet or Schedule D Tax Worksheet. Chapter 22 explains these alternatives.

AMT. If you are subject to alternative minimum tax (AMT) on Form 6251, you generally apply either a 26% or 28% rate to your AMT taxable income (as reduced by the applicable AMT exemption), but the favorable regular tax rates for net capital gains and qualified dividends also apply for AMT purposes (23.1).

1.3 Filing Separately Instead of Jointly

Filing a joint return saves taxes for a married couple where one spouse earns all, or substantially all, of the taxable income. If both you and your spouse earn taxable income, you should figure your tax on joint and separate returns to determine which method provides the lower tax.

Although your tax rate (1.2) will generally be higher on a separate return, filing separately may provide an overall tax savings (for both of you together) where filing separately allows you to claim more deductions. On separate returns, larger amounts of medical expenses, casualty losses, or miscellaneous deductions may be deductible because lower adjusted gross income floors apply. Unless one spouse earns substantially more than the other, separate and joint tax rates are likely to be the same, regardless of the type of returns filed. The Example on page 12 illustrates how filing separately can save you taxes.

Suspicious of your spouse''s tax reporting? If you suspect that your spouse is evading taxes and may be liable on a joint return, you may want to file a separate return. By filing separately, you avoid liability for unpaid taxes due on a joint return, plus interest and penalties.

If you do file jointly and the IRS tries to collect tax due on the joint return from you personally, you may be able to avoid liability under the innocent spouse rules (1.7). If you are no longer married to or are separated from the person with whom you jointly filed, you may be able to elect separate liability treatment (1.8).

Standard deduction restriction on separate returns. Keep in mind that if you and your spouse file separately, both must either itemize or claim the standard deduction, which is $5,700 in 2009 for married persons filing separately (13.3). Thus, if your spouse itemizes deductions on Schedule A of Form 1040, your standard deduction is zero; you do not have the option of claiming the $5,700 standard deduction and must itemize your deductions even if they are much less than $5,700.

Joint return required for certain benefits. Also be aware that certain tax benefits may be claimed by married persons only if they file jointly.

If you want to take advantage of the $25,000 rental loss allowance (10.2) or the credit for the elderly and disabled (Chapter 34), you must file jointly unless you live apart for the whole year. You must file jointly to claim an IRA deduction for a nonworking spouse (8.3). Roth IRA contributions generally may not be made by a married person filing separately because of an extremely low phase-out range (8.20). You must file jointly to convert a traditional IRA to a Roth IRA (8.21). A joint return is required to claim the Hope credit or lifetime learning credit (33.7), the tuition and fees deduction (33.13), or the deduction for student loan interest (33.14). You must file jointly to claim the dependent care credit or the earned income credit (Chapter 25), unless you live apart for the last six months of the year.

Other restrictions may increase your tax if you file a separate return. In figuring whether you are subject to alternative minimum tax (AMT), your exemption amount is half that allowed to a joint return filer (23.1). Furthermore, if you receive Social Security benefits, 85% of your benefits are generally subject to tax on a separate return; see Chapter 34.

1.4 Filing a Joint Return

If you are married at the end of the year, you may file a joint return with your spouse. For federal tax purposes, a marriage means only a legal union between a man and woman as husband and wife. Filing jointly saves taxes for many married couples, but if you and your spouse both earn taxable income, in some cases overall tax liability is reduced by filing separately (1.3).

You may not file a 2009 joint return if you were divorced under a decree of divorce or separate maintenance that is final by the end of the year. You may file jointly if you separated during 2009 under an interlocutory (temporary or provisional) decree or order, so long as a final divorce decree was not entered by the end of the year. If during the period that a divorce decree is interlocutory you are permitted to remarry in another state, the IRS recognizes the new marriage and allows a joint return to be filed with the new spouse. However, courts have refused to allow a joint return where a new marriage took place in Mexico during the interlocutory period in violation of California law.

Both spouses generally liable on joint return but "innocent" spouse may be relieved of liability. When you and your spouse file jointly, each of you may generally be held individually liable for the entire tax due, plus interest and any penalties. The IRS may try to collect the entire amount due from you even if your spouse earned all of the income reported on the joint return, or even if you have divorced under an agreement that holds your former spouse responsible for the taxes on the joint returns you filed together. However, there are exceptions to this joint liability rule for "innocent" spouses and for divorced or separated persons.

You may be able to obtain innocent spouse relief where tax on your joint return was understated without your knowledge because your spouse omitted income or claimed erroneous deductions or tax credits. In such a case, you may make an innocent spouse election within two years from the time the IRS begins a collection effort from you for taxes due on the return (1.7).

Furthermore, if you are divorced, legally separated, living apart or the spouse with whom you filed jointly has died, you may be able to avoid tax on the portion of a joint return deficiency that is allocable to your ex-spouse by making a separate liability election (1.8) within two years of the time the IRS begins collection efforts against you. You may make the separate liability election even if you apply for innocent spouse relief. In some cases, it may be easier to qualify for relief under the separate liability rules than under the innocent spouse rules because innocent spouse relief may be denied if you had "reason to know" that tax was understated on the joint return, whereas the IRS must show that you had "actual knowledge" of the omitted income or erroneous deductions or credits to deny a separate liability election.

Signing the joint return. Both you and your spouse must sign the joint return. Under the following rules, if your spouse is unable to sign, you may sign for him or her.

If, because of illness, your spouse is physically unable to sign the joint return, you may, with the oral consent of your spouse, sign his or her name on the return followed by the words "By ______, Husband (or Wife)." You then sign the return again in your own right and attach a signed and dated statement with the following information: (1) the type of form being filed, (2) the tax year, (3) the reason for the inability of the sick spouse to sign, and (4) that the sick spouse has consented to your signing.

To sign for your spouse in other situations, you need authorization in the form of a power of attorney, which must be attached to the return. IRS Form 2848 may be used.

If your spouse does not file, you may be able to prove you filed a joint return even if your spouse did not sign and you did not sign as your spouse''s agent where:

You intended it to be a joint return-your spouse''s income was included (or the spouse had no income). Your spouse agreed to have you handle tax matters and you filed a joint return. Your answers to the questions on the tax return indicate you intended to file a joint return. Your spouse''s failure to sign can be explained.

1.5 Nonresident Alien Spouse

If either you or your spouse was a nonresident alien (1.16) during any part of the year, a joint return may be filed only if both of you make a special election to be taxed on your worldwide income. Thus, if you are a U.S. citizen and your spouse is a nonresident alien at the beginning of the year who becomes a resident during the year, the special election to file jointly must be made.

If the election is not made, you may be able to claim your nonresident alien spouse as an exemption on a return filed as married filing separately, but only if the spouse had no income and could not be claimed as a dependent by another taxpayer (21.2). If the alien spouse becomes a resident before the beginning of the next tax year, you may file jointly for that year.

A couple who make the election must keep books and records of their worldwide income and give the IRS access to such books and records. If either spouse does not provide the necessary information to the IRS, the election is terminated. Furthermore, the election is terminated if either spouse revokes it or dies; revocation before the due date of the return is effective for that return. The election automatically terminates in the year following the year of the death of either spouse. However, if the survivor is a U.S. citizen or resident and has a qualifying child, he or she may be able to use joint return rates as a qualifying widow or widower (1.11) in the two years following the year of the spouse''s death. The election to file jointly also terminates if the couple is legally separated under a decree of divorce or separate maintenance. Termination is effective as of the beginning of the taxable year of the legal separation. If neither spouse is a citizen or resident for any part of the taxable year, an election may not be made and an existing election is suspended. If an election is suspended it may again become effective if either spouse becomes a U.S. citizen or resident. Once the election is terminated, neither spouse may ever again make the election to file jointly.

Electing to file a joint return does not terminate the special withholding on the nonresident alien''s income.

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Excerpted from J.K. Lasser''s Your Income Tax 2010by J. K. Lasser Copyright © 2010 by John Wiley & Sons, Ltd. Excerpted by permission.
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