Tax season can be a bewildering time for many individuals, as the complexities of the U.S. tax code can seem overwhelming. However, one of the most fundamental decisions you must make when filing your taxes is choosing the right tax filing status.
The IRS explains individuals have five options for filing status on their federal taxes. Your tax filing status determines the tax rate you will be subject to, the deductions and credits you are eligible for and the overall structure of your tax return.
The tax code offers different rates for different filing statuses. If you choose the status that best suits your circumstances, you can potentially reduce your tax liability. The wrong choice could result in paying more taxes than necessary.
Eligibility for credits and deductions
Many tax credits and deductions depend on your filing status. For example, head-of-household filers often qualify for more significant deductions compared to single filers. By selecting the wrong status, you could miss out on valuable tax benefits, leaving money on the table.
Social Security benefits
Your tax filing status can also impact your eligibility for Social Security benefits in the future. The benefits you receive depend on your reported income, and choosing the right filing status can potentially help you optimize your future retirement income.
Affect on future plans
The choice of your filing status can have far-reaching implications for your future financial plans. For instance, if you are considering buying a home, lenders often assess your tax returns. A favorable tax filing status can improve your chances of securing a mortgage at a good interest rate.
Selecting the correct tax filing status is essential for legal compliance. If you knowingly choose an inappropriate status, it can lead to tax penalties and legal complications.
To ensure you make the right choice, take the time to assess your personal and financial circumstances. Consider factors such as your marital status, dependents, income and future financial goals. When tax season arrives, do not rush through this decision.