If you are a U.S citizen, permanent resident or non-U.S citizen who earns income connected with any activities in the U.S, generally you are subject to U.S Individual Tax. The U.S. adopted a progressive tax rate as most other advanced countries do. The tax rates range from 15% to 39.6%, which is considered very high compared to other countries. The progressive tax rate table significantly varies with their filing status. Every taxpayer falls into one of the 5 filing statuses below under IRC §1. 

1) Married Filing Jointly (MFJ) or 2) Qualifying widow(er) (i.e., Surviving Spouse)

Individuals with MFJ or Qualifying widow(er) filing status benefit from the most favorable tax rate. 

There is no particular condition under which individuals may file their tax return with 1) MFJ status as long as they are married at the end of the taxable year. 

However, to qualify for the status of 2) Qualifying Widow(er), there are two conditions to be met. 

1) The eligible years for Qualifying Widow(er) are only 2 years following the death of spouse. An surviving spouse is still allowed to file MFJ for the year when his or her spouse dies. For following 2 years, the individual may file in Qualifying Widow(er) status, which is as favorable as the MFJ tax table. 

2) The surviving spouse must have at least one dependent who lives in the same household, and provide more than 50% of the costs maintaining the household for entire year.  

* What is included in the costs of maintaining household?

Included 

Not included

Rent, Mortgage, Interest, Taxes, Insurance on home, repairs, and food 


Cost of clothing, education, medical expenses, vacations, life insurance, transportation. rental value of home, value of taxpayer's services


What is indicated by Qualifying Widow status is that a surviving spouse maintains the tax benefit equivalent to MFJ for 2 years only if  he or she keeps at least one dependent in household, paying the most expenses(50% or more) of maintaining household. 

3) Head of households

        

Simply put, Head of Households status is generally a status next to Qualifying Widow status. After the 2 years of Qualifying widow status, if a surviving spouse still keeps the dependent in the his or her household and support the dependent, he or she is entitled to a somewhat less, but still favorable tax table. The followings are the detailed conditions for qualifying for Head of household. 

1) An individual other than a qualifying widow must be not married.

2) The individual must live with at least one dependent in the same household and provide at least 50% of costs of maintaining the household for more than half a year. (exception: the individual's parents do not need to be living together as long as the individual support 50% of the parents' household (i.e., nursing home)

4) Married filing Separately

        

This is the least favorable tax table for an individual taxpayer. Thus, most married taxpayers do not choose this status. However, if each married individual generates huge income streams, under a few circumstances, MFS produces more favorable tax result after taking deductions and tax credits into consideration.  

 5) Single

         

If an individual is not married and does not have any dependent living together, he or she must file with Single status. 

The picture below is a brief cycle of an individual's tax filing status. 

In general, personal interest expenses are not deductible from taxable income. For example, you are delinquent on monthly credit card payments for grocery purchases, so interests were charged on the late payments. The related interest amount is not allowed to offset your taxable income. However, the Internal Revenue Code § 163 made certain exceptions. Among the exceptions are interests incurred from the following residence related indebtedness. 

i)  "Acquisition indebtedness" 

An individual takes out a mortgage to acquires a residence. Interest incurring on the mortgage amounted up to $1,000,000 ($500,000 if married filing separately) can be deducted from the individual's taxable income.

ii) Home equity indebtedness

An individual takes out a loan secured by the residence. The interest incurring on the loan amounted up to $100,000 ($50,000 if married filing separately) can be deducted from taxable income. However, the $100,000 (or $50,000) limitation is reduced to the amount fair market value of the residence's equity which is fair market value of the residence minus the acquisition indebtedness, if the residence's equity value is lesser than $100,000 (or $50,000)

That is, home equity indebtedness cannot exceed its equity value to qualify for interest deduction. 

The following is a part of IRC 163. 


26 U.S. Code § 163 - Interest

(3)Qualified residence interest

For purposes of this subsection—

(A)In generalThe term “qualified residence interest” means any interest which is paid or accrued during the taxable year on—
(i)
acquisition indebtedness with respect to any qualified residence of the taxpayer, or
(ii)
home equity indebtedness with respect to any qualified residence of the taxpayer.
For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued.
(B)Acquisition indebtedness
(i)In generalThe term “acquisition indebtedness” means any indebtedness which—
(I)
is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and
(II)
is secured by such residence.
 Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.
(ii)$1,000,000 limitation

The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1,000,000 ($500,000 in the case of a married individual filing a separate return).

(C)Home equity indebtedness
(i)In generalThe term “home equity indebtedness” means any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed—
(I)
the fair market value of such qualified residence, reduced by
(II)
the amount of acquisition indebtedness with respect to such residence.
(ii)Limitation

The aggregate amount treated as home equity indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a separate return by a married individual).

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