What is the Best Tax Filing Status for High Income Earners?

Unmarried Earners

With all else being equal, the worst filing status you can choose when earning high amounts of income is the single status, since the least favorable tax rates will apply. If you are unmarried at the end of the tax year, you're better off choosing the head of household filing status, provided you qualify. To use the head of household status, you must claim at least one dependent, reside with that dependent for more than half of the tax year and be responsible for more than half the costs of maintaining that home. If you qualify, you are eligible for a larger standard deduction, and larger portions of your income are subject to lower tax rates. For example, in 2011 a single filer pays 10 percent on the first $8,500 of taxable income, whereas head of household filers pay the same rate on taxable income up to $12,150.

If debating whether to use the head of household filing status, you must also ensure that you qualify to claim a dependent. When the dependent is a child, the IRS requires that he not provide more than half of his own financial support during the year, live with you for more than half of the tax year and be under the age of 19, or under 24 if a full-time student at the end of the year. If the person you want to claim as a dependent is not a child, you must provide more than half of his financial support during the tax year; and under no circumstances can they earn $3,650 or more of income that isn't tax-exempt.

If you earn a high level of income and want to pay the least amount of tax possible, then filing as married filing jointly will impose the lowest rates of tax. The tax benefits of this status can be more significant than the other statuses. This is because each tax bracket includes the widest ranges of taxable income, which results in lower tax rates applying to more of your income. In 2011, the IRS allows up to $17,000 of your joint income to be taxed at the 10 percent tax rate, and also provides the largest standard deduction, $11,600. This is especially beneficial when your spouse earns much less than you, because the IRS treats you as each earning 50 percent.

Qualifying to file a joint return with your spouse is relatively easy. You only need to be married by the last day of the tax year, and your spouse must consent to filing a joint return. This is because the IRS will not impose joint liability of a tax debt on anyone unless they agree to share that liability.