Filing Status in the Era of Tax Reform

The tax overhaul bill that became law just before Christmas means a lot of changes to payroll for 2018. Among them is withholding. While the law keeps all seven tax brackets intact, six of the seven have been reduced. Employees are expected to begin requesting new W-4 forms to adjust withholding accordingly.

For employers, this means fully understanding filing status so that employee questions can be answered correctly. Some employees will be expecting HR team members to explain filing status and withholding to them. Such explanations begin with the five different filing statuses, says BenefitMall.

  • 1. Single

The most common filing status is arguably the Single status. Single people are those who are unmarried AND do not meet any of the qualifications for the other options. Most single filers are those who are not married and have no dependents, though there are some widows and widowers who may qualify depending on when the death of their spouses occurred.

  • 2. Married Filing Jointly

The next most common filing status is Married Filing Jointly. Couples who file under it are essentially combining their income for federal and state taxes. They are taxed at a lower rate than single filers or married people filing separately.

For this filing status to be used, both spouses must agree to it. The status can still be used if a spouse dies, but only in the tax year in which the death occurred. A new filing status must be chosen for the following tax year unless the widow or widower remarries prior to the start of the year.

  • 3. Married Filing Separately

Some married couples prefer to file separately if they believe doing so has tax benefits. This is a common scenario when one spouse is an extremely high earner compared to the other. It should be noted that two separate tax returns are required under this status.

  • 4. Head of Household

Individuals who are the heads of their households and unmarried can use this status to reduce tax liabilities while caring for dependents. Divorced parents whose children spend more than half the year living with them often use this status to reduce withholding in favor of higher weekly paychecks.

  • 5. Qualifying Widow with Dependent Child

Widows and widowers with dependent children can take advantage of this filing status for up to two years following the death of a spouse. The advantage here is a lower tax liability similar to what would have been enjoyed by two surviving parents exercising the Married Filing Jointly option.

  • 6. What Employees Need to Know

Once employees fully understand which filing status is most applicable to their situations, they need to understand how withholdings are determined. There is no black and white number that applies across the board to every employee filing in the same status. Filing status is just the start of the withholding equation.

Withholding amounts depend on filing status, the number of exemptions claimed, annual income, and other factors. The best way to approach this with employees is to look at their withholdings from the previous year. If said withholding resulted in an unusually large tax refund, it would be advantageous to fill out a new W-4 form dictating lower withholding amounts. This would create larger paychecks along with a lower refund in the spring.

If an employee ends up owing money at the end of the tax year, increasing withholdings via a new W-4 form is advised. It is far better to withhold too much and get a refund than to withhold too little and face an expensive tax bill with penalties.