Ep. 135 | Love, Taxes, and Filing Status
Download MP3Welcome back to the teaching tax flow podcast episode 135. Today, we are looking at how your filing status can greatly impact your tax returns. So before we get into that topic, as we always do, let's take a brief moment and thank our episode sponsor.
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John Tripolsky:Hey, everybody, and welcome back to the Teaching Tax Full podcast. As you've seen in the show notes or you've seen in the title, you can't put a price on love. Now what in the world does that mean when it comes to your taxes and filing status? We're about to dive into, excuse me. See, I'm getting all choked up here.
John Tripolsky:Thinking of Cupid, I guess. But where I was going with that. I know there's a ton of information in this, and Chris Picchiro, welcome back to your own show, sir. But before before I hand the mic over to you, as I mentioned, there's so much in this that I could imagine we could probably have a four hour conversation on how each status change may kinda drive you in a different direction. But in this one, we'll just kinda skim over it maybe a little bit.
John Tripolsky:Now I'll give you the mic. Alright. Welcome.
Chris Picciurro, CPA:Welcome. And, John, you know, if you really love me, you would have bought me, no pun intended, a red teaching tax flow shirt. If you are not watching this, or you're listening, go check out our YouTube channel because I have a plethora of teaching tax flow T shirts, but nothing in red. Nothing in red. Appropriate for this for this podcast recording.
Chris Picciurro, CPA:But that's alright. I I still love you, and we still appreciate you. Everyone, I mean, these topics, I I mean, we we are very heartfelt about this. They're coming from our teaching tax flow community, and that is the heart of it, is is our defeating taxes private Facebook group, defeatingtaxes.com. But what we've been seeing, John, actually, we are getting a ton of comments, on our YouTube channel videos, which is teaching tax flows YouTube channel, And they're really good comments, so we're answering those, as they come in.
Chris Picciurro, CPA:We love it. And because because we're getting these comments, because we're listening to our community and we have an amazing community that likes to chime in, that drives us to be able to provide show topic ideas to back to the community and and dive into things. And this is like you know, filing status is an often overlooked item when it comes to taxes. And and a lot of times, people say, well, what's so complicated about that? Well, it can be very murky.
Chris Picciurro, CPA:Right? Marital statuses change in all the time, and and and it could be it could be something that could could really play with your tax situation. So today, like you said, John, can't put a price on love. I say that to I've saying that to clients for many, many years. Even Cupid can't override the internal revenue code, so let's dive into what that means.
Chris Picciurro, CPA:There are five filing statuses, and each filing status has its own set of tax brackets. Right? Because so someone's income, that's why I want you to think about is as you listen to this. We know if when because you're an avid listener of the teaching tax flow podcast, you already know that different income is taxed at different rates. However, you could have a taxpayer with this a certain amount of income, and based on their filing status, we'll pay a different amount of tax on that same income.
Chris Picciurro, CPA:That's what's so interesting about filing status. So we have five filing statuses, and I'm gonna run through those with you today, and then we're gonna talk about some quirky things and some ideas and some unique rules within those filing statuses, John. So And I know we're off to
John Tripolsky:a great start already because for the first time, I think, ever in the history of the show, you busted out the cheesy dad joke before.
Chris Picciurro, CPA:Oh, I've got a lot
John Tripolsky:of them. Me.
Chris Picciurro, CPA:So Well, we're and we're
John Tripolsky:gonna Congratulations, sir.
Chris Picciurro, CPA:We're gonna remember we're gonna remember that your marital status on the last day of the year, so December 31, is your marital status for the entire year. A common question we receive is, yeah. I got married in June. Do I file a tax return single for the first half of the year, married for the second half of the year. So we're so just think about that.
Chris Picciurro, CPA:Whatever your status is at the last day of the year is your status for the entire year. We're gonna start off with the first the first filing status. John, it's the status we were both at when we met many, many, many years ago.
John Tripolsky:That is true. Single. Singleing and mingling. Well, I shouldn't say mingling. I was I was.
John Tripolsky:I was pretty young at that time, but I was still I was I was chasing the ladies of the jet skis, I think, in the middle of the lake at that time. Well,
Chris Picciurro, CPA:you were yeah. Luckily, you're not we're not single and looking to mingle because I don't think it would bear well for us. But we are both single, and we were both single. And what does that mean?
John Tripolsky:That came across completely wrong. No. It was
Chris Picciurro, CPA:Exactly. Trust us, guys. It was over twenty years ago if you're listening to this.
John Tripolsky:Oh, god.
Chris Picciurro, CPA:So what is single? I I mean, you might chuckle at this and say, oh, come on now. Is that what's so complicated about this? So it applies to people that are again, remember, December 31, unmarried or legally separated under divorce decree at December 31. So this is a really tricky thing to remember.
Chris Picciurro, CPA:Let's pretend you have a married couple. Let's pretend that they get legally separated in April of a certain year, and they are living in two separate abodes, and they have a legal separation agreement. Technically, even though their marriage might not or their divorce might not be finalized by December 31, in the IRS's eyes, they can each file as a single taxpayer. That is advantageous for the taxpayer instead of having to file married separately, which we're gonna touch on in a couple minutes. So that's pretty that's pretty crazy that, you know, that that could play a role.
Chris Picciurro, CPA:So you could be married on paper, but a single taxpayer. And this is this this is the, you know, the the default filing status for unmarried individuals. Now if you're unmarried, you could fit into one or the other. Actually, there's two other filing statuses you could be, but this is your default.
John Tripolsky:So Makes sense. Makes sense.
Chris Picciurro, CPA:The second filing status we're gonna talk about is married filing jointly. That means you're legally married on December 31 even if you didn't live together the entire year, as I mentioned. You could have gotten married in May. If you love football, we know you're not gonna get married in the fall. You could get married in August, I believe, like Johnny t did.
Chris Picciurro, CPA:Luckily, it was up in Michigan, so we weren't sweating too much in our tuxedos. Yeah. These these weddings in, like, Florida, Alabama, even here in Nashville in in the summer, the guys really cook like a cook it up on on those hot summer days.
John Tripolsky:It's like there's a reason why when I lived in South Carolina, getting married in the summer was deeply discounted. And frowned upon. Give them away.
Chris Picciurro, CPA:And frowned upon, John. But married filing joint, in that filing status, what's happening is the spouses are combining all their income, all of their deductions, all their credits, all of their dependents. It does provide you with the highest standard deduction. So the standard deduction in 2024 was over almost almost $30,000. And the cool thing is is if you file married jointly, you're still eligible for a full earned income credit, a full child tax credit, education credit.
Chris Picciurro, CPA:So in general, if you're married, from a purely a tax perspective, we're gonna talk about later on when it might not make sense to file jointly, but from purely a tax perspective, this is the best filing status for you. However, if you do file jointly, understand that you're jointly and severally liable for any tax owed even if one spouse earned the income. So, John, let's say you are some slug, and your wife was a go getter, and she supported you, and you didn't even help with the with your child. All you did was pet the dog.
John Tripolsky:But in having a Bassinam, that's easy because he's always in one spot.
Chris Picciurro, CPA:He's asleep. You know, we know Cooper Cooper has some challenges with vision, but but we still love him. And but even if one spouse under withholds on their w two wages, you're both jointly and separately liable. Now there are some exceptions with innocent spousal support, and we're gonna talk about withholding and that kind of stuff in the future, but the later on this podcast. So married but married join is typically your best option if you are married.
Chris Picciurro, CPA:Now the third status is married filing separately. Okay? Married filing separately, that mean so if you are married legally at the end of the year, that doesn't require you to file with your spouse. That's a common question as well. A lot of times people come into the teaching tax law community, oh, I got married.
Chris Picciurro, CPA:Do we need to you don't have to file together. A lot of times, it makes sense, but sometimes it makes sense not to file together, especially if you have maybe a second marriage or you've got certain you know, you there there are some things that have been established previously that you were planning for. And the advantage of married filing separately is you're only responsible for your own tax return. You're not taking in that joint and several tax liability for your spouse. Now if you file married separately, you are gonna get disqualified for several credits, like the earned income tax credit.
Chris Picciurro, CPA:You're gonna get a reduced child tax credit, and you do not receive the student loan interest deduction. So the point is, if you're married filing separately, you will have less ability in general to take tax credits and some of the deductions. Sometimes it makes sense. Right? It could make sense from a financial perspective.
Chris Picciurro, CPA:It could make sense from a nonfinancial perspective. Let's say you have a lot of medical expenses or one spouse can itemize. Now if one spouse itemizes, the other spouse has to itemize. Well, let's say for some reason financially, and I'm gonna put it at about one, maybe one and a half percent, it makes sense to file separately. You can you can do that.
Chris Picciurro, CPA:It might make sense if you one, for planning purposes of somebody's income for student loan repayments based on their tax return. It could make sense if there's if you're separated from your spouse during the year, you're not legally separated, or you've got some legal or financial concerns with your spouse. Right? You could maybe they are involved in a lawsuit. Maybe their spouse has got some some things that they're working through that you quite frankly don't want to be a party to, and you don't wanna file together.
Chris Picciurro, CPA:So that is married to filing supra.
John Tripolsky:And with that one, Chris, I kinda and and not really a question for you at all, but to kinda what it sounds like for, you know, the the nontax guy in the in the room. It seems like that is extremely rare. And most of the time or I should say extremely rare when it makes the most sense. But at some point, right, you you almost some individuals might make the decision like, you know what? Yep.
John Tripolsky:And I understand we kind of get nixed out of some benefit, but there's something else going on. It's more of a preference Right. Than a benefit, you
Chris Picciurro, CPA:should say. I would say if I had to put in a number on it, I would say about one to one and a half percent of the time financially, it makes sense to file separately. I would say about 5% of the time three to 5% of the time, it makes sense to file separately for other nontax reasons. Let's put it that way. I shouldn't say financial, but yet, for non tax reason, but they could be somewhat financial.
Chris Picciurro, CPA:They could be non financial. They could be legal. They could be for a variety of of concerns.
John Tripolsky:Makes sense.
Chris Picciurro, CPA:And quite frankly, you could have a I mean, this I've been doing this for a long time. There are there are taxpayers out there that, quite frankly, keep all of their finances separate. They're married. They have a they in they have a healthy what we would consider a healthy marriage. They just happen to say, we are going to both maybe contribute to the household financially, but what I do with my money and my investments or what the other person does with their money and their investments are completely autonomous, and they just file separately for that reason.
John Tripolsky:Mhmm. Or you can see it if somebody is a w two. Everything is very systematic for them. You know? Around comes tax day, quote unquote.
John Tripolsky:If you can't see it, they file it. They get their refund. They move on their way. The other person's a business owner filing extensions. They don't wanna deal with it.
John Tripolsky:They just Sure.
Chris Picciurro, CPA:Move along. Right? There's a lot of reasons. Absolutely.
John Tripolsky:Right.
Chris Picciurro, CPA:So let's go with the fourth out of five filing statuses. Head of householder, HOH. It's kind of the s corp of of filing statuses. Right? It's got some attributes of a single taxpayer.
Chris Picciurro, CPA:It's got the attributes of someone that's married because you have dependents. But a head of household applies when you're unmarried or considered unmarried. Remember when we talked about that, you know, maybe legally separated at the end of the year. So someone that would typically file a sing as a single taxpayer. However, they support a qualifying person or dependent, and then they're head of a household.
Chris Picciurro, CPA:The cool thing with head of household is you have your you have a larger standard deduction than single, and your tax brackets are your tax is reduced. So the same amount income for a head of household person is taxed less than a single person. It means those tax when we look at the tax brackets now you remember us are are fans of teaching tax law. Your marginal tax rate's more important than your tax bracket, but you ascend into the higher tax brackets brackets at a slower pace head of household versus versus single. So how do you become a head of household?
Chris Picciurro, CPA:Well, like I said, you have to support a qualifying person. What the heck does that mean? You've gotta pay for more than half the cost of maintaining a home for a qualifying person, and the qualifying person has to live with you for more than half of the year. Typically so typically, that qualifying person is gonna be a child, but it doesn't have to be. And you can actually in some cases, you could have a qualifying person that doesn't live with you.
Chris Picciurro, CPA:I'll give you an example. What if you have a parent that's mature aged? And let's say you they live in your town. You rent an apartment for them, so they have some type of autonomy, but you actually provide more than half of their support. They could still you'd still be ahead of household.
Chris Picciurro, CPA:Or what if potentially, I guess. But what if your you have a qualifying student and they live on a college campus? That's considered a temporary as temporary residence. Again, head of household gets really sticky, So definitely talk
John Tripolsky:about that comparison. To an s corp. I think that is the best the best way you can put it. And if anybody's wondering where that comparison comes from, I think we've done multiple podcasts now where we've talked about s corps. I won't I I don't want Chris's blood pressure, you know, to go through the roof and, you know, his whole face turn red.
John Tripolsky:So we we won't really get into s corps, but he he lit that fire.
Chris Picciurro, CPA:Well, the the reason I say it's like an s corp is, like I said, it's it's kind of a a merger of two different filing statuses. So check with your tax professional. There are advantages to that. I will say, you know, this gets and this gets really murky also, for lack of a better term. Let's say you have two parents that are not married, and they have dependents together, and who's claiming what child, who qualifies for head of household.
Chris Picciurro, CPA:For those reasons, this is by far the most heavily audited filing status. That being said, if you qualify for head of household, absolutely file us head of household. Just understand that you're gonna need that documentation.
John Tripolsky:Makes sense.
Chris Picciurro, CPA:Final of five. This one is called the qualifying surviving spouse. So if you are married and your spouse passes away, if your spouse died within the last two years, but you're still supporting a dependent child, you can file as qualifying surviving spouse, which allows you to to stay in the married filing jointly standard deduction and file and tax brackets, even though you might otherwise be single or you'd be a head of household otherwise. Alright? And you can do this for two years after the year the spouse passes away, assuming you don't remarry in that in that time frame and you maintain a home for a dependent child.
Chris Picciurro, CPA:So this really helps out taxpayers that are supporting a child, their spouse passes away. Bottom line is they still get to keep that, quote, unquote, married filing, joint filing status for a couple years, which is the which provides them with the higher standard highest standard deduction out of the five in the lowest tax brackets. When I say lowest tax brackets, that means, excuse me, you're ascending into the higher marginal tax rate at a slower pace, meaning at in a higher amount of income.
John Tripolsky:And that last one that we just spoke of there, right, the QSS, I think they they refer to it as, that's the only one that has a time restriction on it. That's a great point. Absolutely. Because every every other one is really whatever the status is, whether how short or how long it is, it is it is until it goes somewhere else. So that one seems like like you mentioned, it's it's basically put in place as a transition period.
Chris Picciurro, CPA:Correct.
John Tripolsky:Awesome.
Chris Picciurro, CPA:Let me leave you with a few different pro tips I wanna talk about touch on real quick, in general, when married filing joint's better to file when you are married versus married filing separate. Then higher income thresholds is a positive. You do have full access to credits like earned income credit, child tax credit, lifetime learning credit slash American opportunity tax credit, and then joint reporting can simplify a lot of deductions. Because think about this, John. If you're filing with a spouse and you both pay the mortgage interest or the real estate taxes, are you paying it both fifty fifty?
Chris Picciurro, CPA:Who's claiming what deduction? It gets a little tricky. So married filing separate, again, protects yourself from a spouse with some tax tax debt or unfiled returns. Let's say you can plan around certain itemized deductions, especially medical expenses because they're subject to a seven and a half percent income threshold. And, again, those income based repayment, issues related to student debt could cause you to go married filing separate.
Chris Picciurro, CPA:When you do get married, definitely talk to your employer if you are an employee and adjust your w four for tax withholding. A lot of times we see people literally, John, two weeks ago in the Defeating Texas private Facebook group, and that's kind of we kinda put a tongue in cheek of, you can't put a price on love. We had a client or no. They're not a client, but a member of the Teaching Tax Tool community say, I got married last year, I owed for the first time on my tax. What did I do wrong?
Chris Picciurro, CPA:Well, you didn't do necessarily anything wrong except you probably didn't update your withholdings from your employer because when you file jointly, you are combining your income. But if you file separately, the tax rates are higher than single.
John Tripolsky:That's some great advice to kinda close-up on, like, move it that way. So
Chris Picciurro, CPA:Yes. I do wanna close-up on one more thing, though.
John Tripolsky:Yeah. Absolutely.
Chris Picciurro, CPA:Kick me off the stage yet.
John Tripolsky:I've been trying, man. I'm trying. I'm trying. I'm try I'm gonna shoot the Cupid arrow your way and see if I can just you know?
Chris Picciurro, CPA:The final thing I'm gonna talk about would mean that the arrow was like a boomerang. And, unfortunately, for Cupid, it got shot in the air, came back, and stuck him in the belly. Because we're talk about divorce. Okay? Two things with that.
Chris Picciurro, CPA:First thing is if you are we know that your filing status the last day of the year is your status for the entire year. Alimony. So alimony after 12/3138, this is through the Tax Cuts and Jobs Act. So any divorce decrees finalized in 2019 or beyond, alimony is not deductible by the person paying it and not taxable income for the person receiving it. For previous agreements, alimony was deductible for the person paying it and taxable income for the person receiving it.
Chris Picciurro, CPA:Child support is never a deduction, and it's never taxable income. And then finally, there are some special rules around retirement plan distributions and the 10% penalty for early distributions. In what you're gonna wanna look at when you're talking about that are QUADROS. That's a qualified domestic relations order. So let's say, John, you have two taxpayers.
Chris Picciurro, CPA:They divorce. One taxpayer has a significant amount on their retirement account, and the court ordered them to transfer that to the the other spouse. If that other spouse takes it as a distribution, it would be taxable. But if they're under the age of 59, typically, there's a 10% penalty. If it's under a quadro, they don't have to pay that penalty.
Chris Picciurro, CPA:So tax professionals, you're gonna want you're gonna wanna talk to your tax professional and always provide them with a divorce decree if you run into this situation.
John Tripolsky:Now I feel like I learned something too. I've never heard of that, Quadro.
Chris Picciurro, CPA:That's good though, John. So that means you're still married.
John Tripolsky:Yeah. Let's let's keep on that track. Otherwise, me and Cupid got some words to exchange with each other. Cupid, meaning it's you actually, buddy. Because if it wasn't for you, I wouldn't have actually met my wife.
Chris Picciurro, CPA:Oh, that's a that's a that I've been known to be called the love doctor, and that's a story for another day
John Tripolsky:with that's a story for a whole another podcast that we can fly under anonymity.
Chris Picciurro, CPA:Yeah. Yes. We will. Anyways. So remember, love is priceless, but your filing status isn't.
Chris Picciurro, CPA:Choose wisely, plan ahead, and don't let the IRS surprise you after the honeymoon or, Jen, a heartbreak.
John Tripolsky:Oh, right to the heart. We need to play a a theme song here. Know? Shot to the heart. Anyways, so, yes, everybody is is obviously, we talked about here.
John Tripolsky:So there's different stages of this. Right? There's different filing statuses. There's different phases of life people go through. I mean, obviously, I would I would say obviously, but majority of people, I would I would make the assumption, majority of taxpayers will transition out of one into the other, maybe back into one in certain situations into a transitional one, as we mentioned.
John Tripolsky:Don't be afraid. As always, reach out to us, defeatingtaxes.com. As Christy mentioned a couple times, there is our private Facebook group. Jump into that. Drop any questions.
John Tripolsky:You can do it anonymously. You do not have to put your name in there. That is a Facebook group, but there's a an option for the anonymous posting. And more importantly than that even, don't really do anything unless you talk to a tax professional. So, yes, you can get a lot of advice from defeating taxes.
John Tripolsky:We are happy to help out. I say we, meaning Chris and the rest of the team at teaching tax flow. Trust me. You don't want any tax advice from the marketing guy. All it will do is drive you to, somewhere else to get the right answer.
John Tripolsky:But that being said, all seriousness, don't make any decisions when it comes to this without knowing exactly what you're doing because as Chris, as you mentioned, there's a pretty hefty implications regardless where you go or if you don't do something, like you mentioned updating your w four. So any questions, you know where to reach out. We are here. We have a team of people ready to help you out as you need, and we will see you back here on the Teaching Tax Flow podcast next week. Different day, completely different topic.
John Tripolsky:Have a great week, everybody.
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