Welcome to the official blog of Brittany Lanphier, managing partner of Lanphier Accounting LLP based in Denver, Colorado!
Any tax guidance in this blog is intended for informational purposes only and is not guidance on which Lanphier Accounting LLP intends for you to rely. All tax issues specific to your business or family are largely facts-and-circumstances based and you should consult your tax advisor (or Brittany directly) to discuss how this might relate to you.
Life…
Phew! Tax busy season is OVER! I am so thankful to all of our clients for the opportunity to serve them this spring. We had a fantastic tax season, and I am pleased to say that I am now rested, showered, and my house is clean. All three of these things happened way too sporadically over the past two months, I painfully admit.
It may sound crazy, but April is one of my favorite months, even though it coincides with one of my busiest times. I love the arrival of spring in the Rockies, which means tennis, Major League Baseball, and my spring wardrobe await me on the other side of the tax deadline.
One other big reason I am partial to April…Dennis and I celebrate our wedding anniversary on April 4th! What were two CPAs doing getting married two weeks before the tax deadline? I wish I had an answer for that — it seemed like a great idea at the time! We did get to take some time to sneak out to a nice dinner, and we are excited for a little five-day getaway together later this week.
In honor of April, I have to take a little space to gush about my business partner, best friend, and husband. I can’t believe how blessed I am to have all three wrapped up in the same incredible person. While I could go on for paragraphs about all the ways he continues to amaze me each new day, I will simply thank him for supporting me in the areas where I excel and contributing strength in the areas I do not. He is patient, wise, thoughtful, and funny as hell, and I could not do this without him.
We were told once early in our business career that we acted “too married”, that we should work to tone down the obvious connection, respect, and admiration we have for each other at least in front of our clients. We promptly disregarded this advice and took the criticism as one of the greatest compliments we have received as a couple. In a world where marriage to too often placed on the back burner of life – secondary at best to careers, kids, and all of life’s other distractions – Dennis and I have committed to making our husband and wife relationship second to none. And while we don’t hold hands or exchange flirting glances during meetings, anyone who meets with us will hopefully see that we unwaveringly support and admire each other both as professionals and as people. If fifty years down the road, people still consider us “too married,” I will count our life as a success…even if we aren’t the most successful business people in Colorado.
Taxes…
In honor of our anniversary, I thought I would discuss the different filing statuses on your federal return and what difference they make to your tax liability. You have probably heard that “Married Filing Jointly” is the most favorable status, but why??
What are the Different Filing Statuses?
There are currently five different withholding statuses available on a federal income tax return:
1) Single
2) Head of Household
3) Married Filing Jointly
4) Married Filing Separately
5) Qualifying Widow(er)
Of those five,”Single” and “Married Filing Jointly” are by far the most common, and therefore, I will spend most of my time discussing them. I will touch on the other three however.
Single
Single is the default filing status if you do not qualify for any of the other listed above. You file as single if you are unmarried or “considered unmarried” on the last day of the year. This may include people who are legally separated by court order or divorced at the end of the year (even if you were not divorced for the entire year).
Single taxpayers have the lowest standard deduction and the highest tax rates (along with Married Filing Separately), which is why this is often considered one of the less favorable filing statuses.
Head of Household
You can file as Head of Household (HOH) if you are unmarried, have cared for a dependent for over half the year, and paid more than half the cost of maintaining a home for a dependent. The dependent does not necessarily have to be your child, although that is definitely the most common. It could be another type of dependent such as a parent or other relative (check with your tax adviser about these rules though).
HOH taxpayers benefit from a higher standard deduction and lower tax rates than single filers, but it is still not as beneficial as Married Filing Jointly.
Married Filing Jointly
Married taxpayers can choose to either file a joint or separate tax return. Unless certain circumstances exist, it is almost always more beneficial to file jointly as you benefit from the lowest tax returns and the highest standard deduction. You may file as married if you were legally married on the last day of the year. So if you are planning a January 1 wedding, it might not be the worst idea to sign that marriage certificate a day early…
Married Filing Separately
Married Filing Separately is the least favorable filing status, not only because you do not benefit from the lower, married tax rates, but also because you are excluded from taking several other beneficial deductions and credits, such as the Child and Dependent Care Credit and most of the tuition/education deductions and credits.
So why would anyone file under this status? Well, if you are a separated and contemplating divorce, but are not legally separated by court decree, if may be more practical to file separate returns. Additionally, if you do not want to be held responsible for the information in your spouse’s returns (i.e. you suspect tax evasion), you can avoid any potential penalties and interest by filing separately from your spouse.
If your spouse did not live with you for the last six months of the year and your home was the main home of a dependent child for more than half of the year, you may qualify for Head of Household filing status even if you are still married.
Qualifying Widow(er)
Surviving spouses may file as a joint return in the year of their spouse’s death. Additionally, if you have a dependent, you may file as Qualifying Widow(er) (“QW”) for the following two years after the year of their death. The tax rates and standard deduction for QW are identical to that of the Married Filing Jointly status.
After two years, your filing status would revert to either Single or Head of Household, whichever applies.
What Difference Do the Statuses Make?
So what difference does your filing status make? How would the tax liability be different for a single individual versus a married couple making the same income?
Well, first let’s take a look at the tax tables. In the US, we have a “progressive tax system” which means that as you make more income, you will face higher and higher tax rates on your excess earnings.
You can see that the tax rates are different between married couples and single individuals. For a single taxpayer, their first $8,350 in income would be taxed at 10%, while a married couple can make up to $16,700 and only be taxed a 10%.
All of the tax rates are not exactly doubled between the married and the single rates, but the lower tax brackets are, representing the fact that a married couple represents two individuals. This is the logic behind the marriage “benefit” is that each individual in the marriage should be taxed at roughly the same rate that they would if they were unmarried.
Where this really become beneficial for a couple is if one spouse earns most or all of the family’s income. They essentially get the benefit of earning income “for” their spouse and having it taxed at a lower rate than if they were earning it all for themselves. Let’s look at a few examples…
Example 1a – Single Boy and Single Girl
Single Boy and Single Girl earn $50,000 each. Assuming they have no dependents and do not itemize their deductions, their taxable income would be:
Income $50,000
Standard Deduction ($5,700)
Exemption for Self ($3,650)
Taxable Income $40,650
Using the tax tables, the tax on this income would be $5,950 a piece for Single Boy and Single Girl, totaling $11,900 between them.
Example 1b – Single Boy and Single Girl become Married Couple
The Singles get married and still earn $50,000 a piece. They now double their standard deduction and can claim two exemptions.
Income $100,000
Standard Deduction ($11,400)
Exemption for Both ($7,000)
Taxable Income $81,300
If we use the tax tables, their tax is once again $11,900. They have not been penalized for simply getting hitched and do not have any extra tax.
Example 2a – Single Boy and Single Girl have Different Incomes
It is pretty rare that a couple meets and earns the exact same income. The previous example was helpful for demonstrating the logic between the tax rate differences. Now, let’s look at what happens if there is a significant difference in their incomes.
Single Boy is a computer programmer and earns $75,000 per year. Single Girl works for a non-profit organization and earns $25,000 per year.
Single Boy’s income tax return looks as follows:
Income $75,000
Standard Deduction ($5,700)
Exemption for Self ($3,650)
Taxable Income $65,650
His tax on this income will total $12,200.
Single Girl’s income tax returns looks a little different:
Income $25,000
Standard Deduction ($5,700)
Exemption for Self ($3,650)
Taxable Income $15,650
Her tax will total $1,530. Together, Single Boy and Single Girl’s tax totals $13,730.
Example 2b – Single Boy and Single Girl get Married (Again)
If at their current incomes, Single Boy and Single Girl get married, their income tax returns will look like this:
Income $100,000
Standard Deduction ($11,400)
Exemption for Both ($7,000)
Taxable Income $81,300
This is exactly the same as it was before when they were earning identical incomes. The total tax will again be $11,900.
Simply by tying the knot, this couple has saved $1,830 in taxes ($13,730 – $11,900). The tax brackets treat it as though both spouses are earning half the income and being taxed accordingly.
One last example…
Example 3a – Single Boy is High Earner
What if Single Boy made $100,000 on his own? His tax return would look like this:
Income $100,000
Standard Deduction ($5,700)
Exemption for Self ($3,650)
Taxable Income $90,650
His tax on this will be $19,102.
Example 3a – Single Boy get Married
If Single Boy gets married, and his wife chooses not to work in anticipation of starting a family, their tax return will again look familiar:
Income $100,000
Standard Deduction ($11,400)
Exemption for Both ($7,000)
Taxable Income $81,300
Their tax is…you guessed it…$11,900. This time Single Boy has saved $7,300 in taxes simply by getting married.
Wrapping Up…
Alright, alright…I don’t want to make anyone feel bad if they are yet to be married or no longer married. Obviously, we don’t make all our decisions in life based on the tax cost/benefit (even CPAs). Although if anyone is trying to nudge their significant other towards married bliss, feel free to use the preceding examples if you think it will help.
Kidding aside, I felt like it would be helpful for everyone to understand the differences and why they exist. It’s not that you are being taxed “more” if you are single, it’s just that if you are married, you can benefit by effectively splitting your incomes between both spouses.
I am a big fan of marriage for more reasons than the tax breaks, so I will wrap up this blog post by saying…HAPPY ANNIVERSARY, Husband!
Best to everyone and Happy Spring as well…Thanks for checking in with us!
Brittany
Lanphier Accounting LLP
600 17th St., Suite 2800 South
Denver, CO 80202
Phone: 720.961.0310
info@LanphierCPA.com