I know. The government is shut down. And, I have no idea if this ridiculous situation will last two more days, two more weeks, or longer. (I am betting if it goes longer than 2 weeks, there will be a veto override to open the USA for business.)
Right now, this shutdown means the IRS is furloughed. So, my client who just (finally) won a big battle to get his money back from the government won’t be seeing that deposited into his accounts anytime soon.
It also means we may not be able to file any taxes for you until late January. Which isn’t quite as bad as you think, since the government has no intention of providing refunds pretty quickly. To make sure they have enough time to make sure you are who you say you are. (Cutting down on identity theft.)
Which means you have some more time for ‘after the year’ planning.
What sort of after the year planning will make a difference?
How you file your taxes. No, not electronically or by mailing paper forms. By the status you claim.
Not Married
Let’s start with some simple rules. If you are not married on the last day of the calendar year, you have one of two options- Filing as a single person, or if you have a dependent- then as Head of Household.
But, wait a minute. To claim that dependent means you have covered more than 50% (that can be 1 cent more than 50%, by the way) of the costs of providing for that dependent- your child, your mom, your challenged sibling, etc. If you don’t cross that half-way point, you have no dependent and must file as a single individual.
Your loving spouse died (OK. Even if it were not a loving spouse.)
If you have not remarried and your spouse died this calendar year, you are entitled to file “jointly” with your dead spouse. For two years after the year of death, you may also be entitled to special benefits as a qualifying widow or widower.
How can you be a qualifying widower or widow? If the year that your spouse died, you were legally entitled to file jointly. (The key word- legally. That means it makes no difference if you both submitted your separate tax returns as married filing separately.) You cannot have remarried in the interim and also must have a dependent child (even if it earned money) who resided in the family home (or rental property) for the entire years, and you covered 50% or more of the costs of maintaining that family home or rental property.
If those choices didn’t cover you, then you are married
Please note that most of the US has disallowed common law marriages. (Virginia did so to stop gay couples from claiming married status about 5 years ago.) The states that allow this category are Colorado, Iowa, Kansas, Montana, Rhode Island, South Carolina, Texas, Utah, and Washington DC. Cohabitation by itself -even for 7 years- may not qualify your union as valid.
And, as long as you are married on 31 December, you are legally married for the entire year.
Which means if you got divorced on 31 December, you were UNMARRIED for the entire year. (By the way, if you get divorced AFTER 31 December 2018, then alimony is not deductible to the payor nor is it taxable to the recipient. That’s a BIG change. It makes it just like child support, in that the payor gets no tax benefits and the recipient enjoys tax-free benefits.)
Now that we have determined you are married, we need to figure out what filing status saves y’all the most money.
MFS? MFJ?
Your choices, if you are legally married, is to file jointly (all family income and expenses are pooled) or separately (W2 and 1099-Misc income goes to the spouse receiving the form; joint accounts and most expenses can be split as desired.)
Filing jointly is the most common filing variety- some 54 million of us file thusly (including “surviving spouses”), only 3 million of us file separately. That’s generally because one pays less taxes when filing jointly.
But, there are some special cases. Let’s start with the one with which I am most familiar.
We no longer trust our spouse. We may be preparing to file for divorce soon, or we know that our spouse is involved in some shady deals. (Yes, this includes those who are drug dealers!) Because should you file a joint return, you have admitted to the government that you are a party to everything that’s included on that return. Filing separately keeps you from being tainted with any dubious deductions or revenue.
High medical costs. If the lower-income spouse has significant medical expenses (or could claim they paid for all the medical costs), the deduction threshold is more easily reached (to declare those expenses deductible; for 2018 income, the medical expense threshold is 7.5% of adjusted gross income (AGI); thereafter the deductible is 10% of AGI.)
QBI considerations. If one spouse has a pass-through entity and his/her adjusted gross income will be less than $ 157,500, then that spouse is entitled to “shield” 20% of the pass-through income (Schedule C businesses, partnerships, S entities, and probably some rental properties). Those moneys are called “Qualified Business Income” (QBI). But, if one filed jointly and the other spouse earns significantly more than $ 157,500, then the 20% QBI deduction gets lost, except under special circumstances. (Call us – or buy my book– for clarification.)
There you have it.
Remember that this is the first year that there are no personal exemptions. It makes no difference if you have 1 dependent (yourself), or 99 dependents. There is no affect on your AGI.
The personal exemption has been lumped into the standard deduction. And, the standard deduction is $ 12K for singles (or married filing singly), $ 18K for head of households, and $ 24K for married filing jointly. You need to exceed those thresholds to itemize deductions. (And, remember, you can only deduct state, local, and property taxes UP TO $ 10K- and no mortgage interest is deductible for principals that exceed $ 1KK– unless it is a NEW mortgage, where the limit drops to $ 750K)
One more thing- if you are filing separately while married, both most itemize or both must use the standard deduction; no other flavors are allowed.
The furloughs also mean no amended tax return processing, no folks with whom to communicate about audits, etc. The computers are still humming away though- presumably flagging any tax return that should be audited.
My cousin’s husband is an enrolled agent and he had already told me about some of the complications of the government shutdown. It is not going to be fun times for anyone in the tax preparation business.
Nor will it be fun for those expecting refunds, IRS assistance, or even those wanting to visit the Smithsonian or the National Zoo. Because they will close starting Wednesday if this foolishness continues.
The shutdown is straight out of Monty Python. It’s the third shutdown in a Congress he controls. Only Trump can be alone in an elevator, when all of a sudden a fight breaks out.
But what’s more laughable is that he’s pulling a hard line on the Wall in the mistaken belief that this was his signature campaign promise. What a poor student of history is Trump.
The Wall promise fired up the wingnuts and the people who are easily spooked by snake oil salesmen. But, if we recall our history, that campaign promised almost sealed Trump’s fate. People were panicking almost as much over the cost of the Wall as they were over all the manufactured characters that were pouring over the border every second of the day.
The signature campaign promise, the one that saved Trump’s butt and got him somehow elected, was that Americans would not pay for the Wall. But Trump doesn’t know that, because he doesn’t read history. So, instead, he’s left alone in an elevator, throwing punches at himself.
Well said, David.
Proof that you are the accomplished wordsmith!