Most favorable way to file taxes for next year...

[ea1776]

So I'm currently planning the best way to file taxes for 2008...

My gross income is 69k (and I expect some capital gains in the 2k range). I contribute 5% of that pretax to 401(k) (employer matches all of that).

I expect that my eligible deductions will not exceed the standard deduction (if they do, not by much).

I'm currently living with and kind of supporting my fiance (won't actually get married until sometime in 2009). We live together, and she does not generate very much income (full time student).

My questions is what's the most favorable way to file/plan for 2008 taxes?

Head of Household?
Can we file jointly?
Claim her as a dependent?

[jIM_Ohio]

You might be able to claim her as a dependant... but there is no "marriage penalty" anymore, so no reason to think that 2 people filing as single is better or worse than one return for a married couple or head of household.

Here are some things to consider:
1) if fiance has any earned income, you could contribute that to a Roth IRA in her name, even if fiance is not the one contributing the money. If fiance had 5k of earned income and you had 5k available, you could write the check for the Roth. That 5k is likely taxed at 10% or 0%, and there might also be a retirement savings credit where you get some of it back on fiance's return. If fiance is a dependant, you cannot get the credit, I THINK. Putting money into Roth at 0% and taking out when taxes are 25% saves you the 25 (Roth withdraws are tax free).

What I would look for are things (credits) where if fiance filed as single she could get the credits, even though you might be the one making the contributions or payments for her.

[sweeps]

You could get married in front of a judge as late as 12/31 and still be considered married the whole year.

If you have tax planning software (TurboTax, etc.), you could try out different scenarios to see what you can do and how your taxes are affected.

[moneybags]

You can only claim a relative as a dependent. Therefore, you have 2 options: get married & file jointly or stay single & both file single. Depending on your fiance's income and age, she could qualify for the EIC. FT students don't qualify for the retirement savings credit. I would research on irs.gov: EIC and IRAs to see if she qualifies for those credits.

I don't see any tax benefit to being married filing jointly.

[sweeps]

This may be a moot point because I doubt OP will get married just to save a little bit on taxes... But I'm not so sure that OP and his girlfriend won't save money by getting married. Deductions, for example, are useless to his girlfriend because she already has $0 income. If they get married he will be able to use deductions such as the standard deduction and the Tuition & Fees deduction. Plus it's possible OP could save on state taxes. But just speaking theoretically here -- only way to find out for sure is to run the numbers.

[ea1776]

This may be a moot point because I doubt OP will get married just to save a little bit on taxes... But I'm not so sure that OP and his girlfriend won't save money by getting married. Deductions, for example, are useless to his girlfriend because she already has $0 income. If they get married he will be able to use deductions such as the standard deduction and the Tuition & Fees deduction. Plus it's possible OP could save on state taxes. But just speaking theoretically here -- only way to find out for sure is to run the numbers.

Right. She may not even file in 08' due to ~$0 income.
If we file jointly, I can deduct tuition and fees possibly. Also, the standard deduction is larger.

Thanks for the help!

[haha325326]

I don't see any tax benefit to being married filing jointly.

[ea1776]

I suppose my original point was, if the standard deduction is larger for being married, and our combined income "shares" the same tax bracket, we will put ourselves in a lower tax bracket if married filing jointly, than single filing separately. Is this correct?

If not (meaning if married we are in different/seperate tax brackets), wouldn't it be smarter for the spouse in the higher tax bracket to contribute as much to the 401(k) as possible, and have the lower tax bracket spouse contribute nothing to retirement account (higher tax bracket spouse would be minimizing tax bracket impact by contributing to retirement for both spouses).

[jIM_Ohio]

I suppose my original point was, if the standard deduction is larger for being married, and our combined income "shares" the same tax bracket, we will put ourselves in a lower tax bracket if married filing jointly, than single filing separately. Is this correct?

If not (meaning if married we are in different/seperate tax brackets), wouldn't it be smarter for the spouse in the higher tax bracket to contribute as much to the 401(k) as possible, and have the lower tax bracket spouse contribute nothing to retirement account (higher tax bracket spouse would be minimizing tax bracket impact by contributing to retirement for both spouses).

69k taxable income is fifteen percent MFJ an is twenty five percent if single (I believe).

There would be advantage to filing married in this regard.
In addition you get the higher deduction.

401k would not matter. You can always adjust witholdings to make it work regardless.

In addition, depending on state, it might be more advantagous to stay single if both spouses work (Ohio is like that).

[ea1776]

We live in Texas and pay no state income taxes, only sales tax.

Yeah, so there is a pretty large benefit then for the money in the 25% region. Saving 10% on (69k-32.5k taxable income)=3.65K in taxes saved, not even counting the deduction (without taking other deductions into account).