Business - Your Money Some taxing family matters

By Eileen AJ Connelly AP Personal Finance Writer NEW YORK (AP) -- The annual ritual of preparing your tax return can generates countless questions, but some of the most basic come right at the start. Decisions about who in the family needs to file a return and how they should file can be almost as puzzling as figuring out appropriate deductions. Should a married couple automatically file a joint return, or would they avoid the so-called marriage penalty if they file separately? Does a retired senior need to submit a return? What about a teenager who holds a part-time job? Here are some questions and answers to help you decide. Q. If you're married, what issues determine if you should file a joint return or separate returns? A. The correct filing status can make a big difference in the amount of tax a couple pays. One key to remember is if you file separately, both returns must either itemize or claim the standard deduction, which for 2009 is $5,700 for single taxpayers or couples filing separately. If you both itemize, one spouse may not have enough deductions to match the standard deduction. If you both take the standard deduction, you may lose out on tax savings that could be claimed by itemizing, like mortgage interest. The Internal Revenue Service says most couples would pay more combined tax on separate returns than on a joint return. That's because when filing separately, in most cases you'll be unable to take credits like those for child and dependent care expenses, education and the earned income credit. And you may only be able to claim just half of several other credits, including the child tax credit, retirement savings contributions credits and the homebuyer credit. There are, however, circumstances when couples will pay less combined tax if they file separate returns. One such situation may arise when one spouse has large health care bills. Medical bills are deductible only if they reach 7.5 percent of adjusted gross income. It's easier to reach that threshold with one income than with two. Another scenario may be if both husband and wife have similar incomes, and combining them bumps them up into a higher tax bracket. If you aren't sure which is the best route to take, it may be worth the time to fill out forms both ways and see which nets the bigger savings. Q: What determines whether a retired senior citizen should file a return? A. In general, whether seniors must file a return depends on their income, filing status, age and whether or not they are claimed as a dependent. The income tiers for required filing, excluding Social Security, start at $9,350 for a single person under age 65, and rise to $13,400 for an unmarried head of household over 65. A chart detailing the different levels can be found in Publication 501 on the IRS Web site, www.irs.gov. If a senior is claimed as a dependent on someone else's return, filing still may be required. Pension or other retirement plan distributions, along with unearned income from sources like interest, could push income high enough to trigger the need for a separate return. The IRS has a program that offers free tax help to seniors. As part of the program, AARP offers counseling at more than 7,000 sites nationwide. Call 1-888-227-7669 or visit www.aarp.org to learn more. Q: What determines if a teenager with a part-time job must file a return? Like seniors, teens may have to file their own return, even if they're claimed as a dependent by their parents. The requirement is triggered by how much they earn. In most cases, that would be $5,700 in wages, or $950 in interest or other unearned income. Because the self-employed must file if they had net earnings of at least $400, teens with their own business of any kind are required to file if their income reached that threshold. Those who work in restaurants or other places where they earn tips may have to file if their employer did not withhold taxes on those tips. But even if your teen doesn't have to file, it could be worth the effort if income tax was withheld from his or her pay, because a refund may result. That's especially true if one of the education credits may be claimed on the return. One thing that's important to remember is that a person who can be claimed as a dependent on another taxpayer's return cannot claim his or her own personal exemption, even if they're not actually claimed as a dependent. If the only income a child has is from interest and/ or dividends, and it was less than $9,500, parents may be able to claim that income on their own return, in which case the child won't have to file a separate return. To do so, parents must fill out Form 8814 in addition to their 1040. That form has more details on the requirements as well. Published: Wed, Mar 10, 2010

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