Women and Taxes: A Guide for 6 Different Scenarios
Betterment data suggests that women will have a wider variety of tax scenarios this year than men. In this comprehensive guide, we look at why, and the kinds of filing decisions women should consider.
Of Betterment’s male customers, almost 80% report full-time employment while only 69% of female customers do. Women are 2.3 times more likely to be working part-time, and 39 times more likely than men to describe their status as “homemaker.”
The wider distribution of work statuses among our female customers suggests that, as a group, they could expect a wider variety of tax situations than our male customers.
Taxes are not gender specific. You earn money, you pay taxes.
However, recent Betterment data tells a slightly different story. Of Betterment’s male customers, almost 80% report full-time employment while only 69% of female customers do.
While the remaining 20% of men are mainly students or self-employed, the remaining 31% of women run the gamut in terms of what they do. Sure, some are also students and self-employed, but women are 2.3 times more likely to be working part-time, and 39 times more likely than men to describe their status as “homemaker.” So while none of these circumstances are exclusive to women, more women appear likely to find themselves in situations with special considerations.
“The wider distribution of work statuses among our female customers suggests that, as a group, they could expect a wider variety of tax situations than our male customers,” said Alex Benke, CFPⓇ, Betterment’s Director of Advice Products. “Whether they’re married, divorced, widowed, single, or with or without dependents, there is an array of tax credits, deductions, and important ramifications to keep in mind that could ultimately affect their tax outcome.”
Betterment is not a tax advisor; you should consult one for your own situation.
When to File Jointly
There are generally more tax benefits for married taxpayers filing jointly. Specifically, the Married Filing Jointly status offers a couple the most favorable tax brackets and makes them eligible for a variety of valuable tax credits, such as education credits. These include the Earned Income Credit and the Premium Tax Credit, which helps taxpayers with the cost of health insurance.
In most scenarios, a married couple is simply going to pay less tax if they file jointly, said Heather Locus, Principal and Wealth Manager at Balasa Dinvero Foltz, a wealth management firm in Itasca, Ill. By combining income, a couple puts themselves into a lower tax bracket if there’s a high and a low wage earner.
For example, if a woman makes $150,000 and her husband doesn’t work, their combined income is $150,000, putting them in the 28% bracket. If she filed separately, however, she’d be bumped up to the 33% bracket.
When to File Separately
Couples who file jointly are both liable, individually and together as a couple, for the entire tax liability on the tax return, Perlman said. So, in some cases, couples might choose to forgo the tax breaks, even if it means their finances won’t be blended.
One reason a married couple might file separately is if one spouse had concerns about what the other is reporting to the IRS, said Locus, who is also lead on the Women’s Service Team at Balasa Dinvero Foltz. “If you’re the wife, and the husband is not reporting taxable income, and you file a joint return with him, then you’re liable to the IRS.”
There are even situations where filing separately could lower a tax bill. For example, if one of the spouses has low income and high medical bills, it could work in their favor to file separately to claim these expenses as itemized deductions, Perlman said. This is because their combined income could make it difficult to reach the threshold for claiming medical expenses.
Or, if one spouse has outstanding student debt, that spouse may want to file separately, said Gina Noy, CPAⓇ, of New York accounting firm Noy Tax. If the student had negotiated an income-based repayment plan prior to getting married, filing jointly could disrupt the plan and cause the monthly payment to increase because their income is now considered to be joint. So, although they could get a larger refund by filing jointly, it may be worth it for the student loan holder to file separately to avoid that increase in monthly payment.
Divorcées and Widows
As a group, women may be less likely than men to be confident in their own ability to manage finances. A 2013 Fidelity study found that more than half of women have more confidence in their partner than in themselves to assume full financial responsibility for retirement finances if necessary.
Locus, who works with many women who are divorced and widowed, said that confidence will rise, especially after a few years of doing taxes.
“Usually for those first couple of years, if they weren’t involved in the finances [in their marriage], it’s overwhelming,” Locus said. “Their personal lives are going through a transition, and it’s just scary. But after doing it for two or three years, it’s amazing to see their confidence grow and to see how good they feel when they never thought it was possible.”
Divorce and Taxes
When it comes to taxes and divorce, your filing status for any given year depends on your marital status on Dec. 31 of that year, Locus said. For example, if you got a divorce in January 2016, but you were still married on Dec. 31, 2015, then you must file as married on your 2015 tax return. However, if you got divorced at any point in time in 2015, then you’re considered to have been divorced for the entire year, and you must file as Single or Head of Household.
The Ramifications of Alimony, Custody, and Remarriage
During divorce negotiations, you should discuss not only the amount of spousal support or maintenance, commonly known as alimony, but also the tax consequences of your options.
For starters, if the payor (your spouse) makes deductible alimony payments, that means you (the recipient) must report the maintenance as income, which could put you into a higher tax bracket. (Note: This is the opposite of child support, which is neither taxable nor deductible.)
Something else to keep in mind: If you are receiving maintenance and want to avoid one giant tax bill after filing, you can either make estimated tax payments quarterly to the IRS, or, if you have a paying job that withholds taxes, you can increase your withholdings to offset the potential impact of maintenance payments. If you’re the one paying maintenance, those payments are deductible from your income. And, remember that alimony typically stops if the receiving spouse remarries.
If you have kids, you’ll also need to determine during divorce negotiations which parent is going to take the dependent exemption. Qualifying not only gets you the exemption—which, for 2015, is $4,000 per child off your taxable income (so if you have two kids, that’s an $8,000 exemption), and for 2016 is $4,050 per child—but it also enables you to file as Head of Household, as opposed to Single. Being a Head of Household puts you in a lower tax bracket, so this, in conjunction with the child exemption and other child-related benefits, will give you the best possible tax outcome, Locus said.
In the absence of any agreement, the custodial parent gets the exemption, but you can also elect to “share” the exemption with your former spouse (although only one parent can claim the exemption in any given tax year). For example, some couples decide that one parent will take it for odd years and the other will take it for even years, Locus said.
If you are sharing the exemption, the custodial parent must give the noncustodial parent a release form, IRS Form 8332, to attached to his or her tax return, Perlman said. If the custodial parent releases the exemption, the noncustodial parent may claim the exemption and child tax credit. The exemption can be released for one year or for multiple years, but the release applies only to the exemption. You may still claim any remaining tax benefits you’re eligible for, including Head of Household filing status and the Earned Income Credit.
Note that in some instances you can use the Head of Household status even if you are still married, Perlman said. You must be living apart from your spouse at all times during the last six months of the year and you must live in the same home with your dependent child(ren) and pay most of the household expenses.
Losing a Spouse
The rules of filing after losing a spouse differ from those of divorce. The year a woman’s spouse dies, she may file jointly, Perlman said. This filing status will usually put the taxpayer in the more tax-beneficial situation.
“The following two years, she may be able to use the Qualifying Widow filing status if she has not remarried and has a dependent son or daughter,” Perlman said. This is similar to the Married Filing Jointly status and typically results in a lower tax bill than she’d get if filing as Single.
If a woman does not have a qualifying dependent, she can file as Married Filing Jointly for the year that her spouse died, but the year of death is the last year for which she can file jointly with her deceased spouse.
Locus offered these examples:
Jen is in her 30s, married, and has small kids. If her spouse dies any time during 2016, Jen can file jointly for 2016. Then, for 2017 and 2018, she can file as Qualifying Widow, but only for those two years. In 2019 and beyond, she would file as Head of Household, unless she remarries—in which case, she’d file either as Married Filing Separately or Married Filing Jointly. If she never remarries, she would file as Single once she no longer had a qualifying dependent.
Jane is in her 60s, married, and her kids are grown and out of the house, so she’s no longer supporting them. If her spouse dies any time during 2016, Jane can file jointly for 2016. However, for tax year 2017 and beyond, she would have to file as Single, instead of Head of Household, because she does not have any qualifying dependents. (Of course, her filing status would change if she were to remarry.)
A single mother is often able to use the Head of Household filing status, Perlman said, which is more favorable than filing as Single because it will usually result in lower taxes. To qualify, the taxpayer must be unmarried and must maintain a home for a qualifying dependent, such as a son or daughter. (Read the IRS rules to learn what counts as a qualifying dependent.)
“It’s always more advantageous to be head of household than single,” Noy said, adding that she often sees single mothers make the mistake of filing as Single because it’s so easy to click “Single” on their tax return.
For example, if a single mother makes $125,000 and files as Single, she’s put into the 28% bracket. But if she files as Head of Household, she’s in a lower tax bracket (25%).
In addition to being able to leverage a more advantageous filing status, parents (or anyone with a qualifying dependent) benefit from four main tax breaks: the child dependent exemption allows a taxpayer to deduct $4,000 (in 2015) from their taxable income for each qualifying child or qualifying relative; the child tax credit is worth up to $1,000 per qualifying child under 17; the Earned Income Credit for low-income workers; and the dependent care credit for parents who are paying for childcare while working or looking for work.
More women than ever are going back or staying in school for an advanced degree, and they’re starting to outpace men in attaining degrees. A study conducted by the American Enterprise Institute, a private research non-profit organization, found that women earned the majority of doctoral degrees in 2012 for the fourth straight year, and outnumbered men in graduate school 141 to 100.
Going back to school can mean more deductions during tax time. People who choose to return to school may be eligible to claim an education benefit, such as the tuition and fees deduction or lifetime learning credit, Perlman said. These benefits include:
- American Opportunity Credit: This tax credit is good for the first four years of college and is based on 100% of the first $2,000 spent on qualifying college expenses and 25% of the next $2,000 for a maximum annual credit per student of $2,500. The credit is phased out for taxpayers with incomes above certain levels—modified adjusted gross income of $90,000 for individuals and $180,000 for married couples filing a joint return.
- Lifetime Learning Credit: The credit can also help students and parents pay part of the cost of college. This credit is worth up to $2,000 per tax return and is available for any level of higher education. It may be especially valuable for a woman who is taking less than a full-time load or who is taking graduate courses. You cannot claim both the American Opportunity Credit and the Lifetime Learning Credit in the same tax year.
- Tuition and Fees Deduction: Students and their parents may be able to deduct qualified college tuition and related expenses of up to $4,000, according to the IRS website. This deduction is also phased out for taxpayers with higher incomes. However, a student cannot claim the American Opportunity or the Hope and Lifetime Learning credits in addition to the Tuition and Fees Deduction. So, this deduction is particularly beneficial to students who don’t qualify for those credits.
Slightly more female Betterment customers are self-employed than their male counterparts (8.4% vs. 7.9%). Self-employment comes with a wide range of tax deductions, including deductions for self-employment tax, business use of a home or car, meals and entertainment, health insurance premiums, and Internet and phone costs. Most self-employment deductions are filed using Schedule C. (Learn more at www.irs.gov.)
Tax season is also a good time to start thinking about rolling over old 401(k)s or IRAs that may be costing you money in fees and taxes, especially for people who are self-employed and may not have a traditional employer-sponsored retirement plan, such as a 401(k) or 403(b). If you don’t have one of those accounts, you can still open a traditional or Roth IRA. If you’re already contributing the maximum ($5,500 in 2015 and 2016, $6,500 if you’re 50 or older) to your Roth IRA and you still want to save more for retirement, you can open a self-employed retirement account, such as a SIMPLE or SEP-IRA. (Read: Retirement Accounts for the Self-Employed)
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