My wife and I have lived separately since last May (more than 6 months of the year). We have two children who spend slightly more time at her home than mine. I make 80% of our combined income and supported her completely during the separation (much much more than half of the cost of her household). We both rent, and do not own any property other than personal belongings.

What is the best filing status for the two of us?

How are our dependents/exemptions allocated?

I am so lost...

“What is the best filing status for the two of us?”---->UNLESS you are divorced under a final decree by the last day of the year, you are STILL considered married for the whole year and as married taxpayers, you can choose between filing a joint tax return or a separate tax return. The MFJ, Married Filing Jointly, filing status, IN GENERAL, provides more tax benefits than filing separate returns, but you will need to weigh the pros and cons and decide for yourselves which is the best filing status. As long as you and your spouse decide to file a joint return, your tax may be lower than your combined tax for the other filing statuses. Also, your standard deduction (in case, you do not itemize deductions on 1040 SCh A) may be higher, and you may qualify for tax benefits that do not apply to other filing statuses. By filing a joint tax return, both of you may be held responsible, jointly and individually, for the tax and any interest or penalty due on your joint return. One spouse may be held responsible for all the tax due even if all the income was earned by the other spouse UNLESS the spouse is subject to innocent spouse relief, separation of liability, or equitable relief. On the contrary, f in general,filing a separate return provides relief from joint liability for taxes. However, married taxpayers who file separately are not eligible for many tax deductions and credits, and have higher tax rates; MFS taxpayers are not eligible to claim the tax benefits,i.e., tuition and fees deduction; credit for the Elderly and Disabled;EIC; Hope or Lifetime Learning Educational Credits; or etc. MFS taxpayers also have lower income phase-out ranges for the IRA deduction. Additionally, MFS taxpayers must both claim the standard deduction or must both itemize their deductions. In other words, one MFS taxpayer cannot claim the standard deduction if the other spouse is itemizing. As you can see, one benefit in filing your return as MFS is; by filing a separate return, you are solely responsible for the accuracy and payment of tax related to that separate return. By contrast, on a jointly filed return, both you and your spouse are jointly responsible for the accuracy of the return and the payment of tax. A spouse who is unwilling to assume legal and financial responsibility for the other spouse's tax obligations should strongly consider filing separately. However, there is a potential tax advantage to filing separately when one spouse has significant medical expenses or miscellaneous itemized deductions.
Please visit the IRS Website here for more info; Publication 501 (2010), Exemptions, Standard Deduction, and Filing Information
“How are our dependents/exemptions allocated?”----> As long as you file a separate return, you generally report only your own income, exemptions, credits, and deductions on your individual return. You can claim an exemption for your spouse if your spouse had no gross income and was not the dependent of another person as you said above. However, if your spouse had any gross income or was the dependent of someone else, you cannot claim an exemption for her on your separate return; what I mean is that you can claim your spouse’s personal exemption, you CAN’T claim your spouse as your dependent; spouses are not dependents of each other. As long as you provide more than half of the dependents, I mean your children with their mother, total support during the year, you can claim the children as your dependents on your return as qualifying relative.

Thanks for the response.

Does HOH come into play for either of us? I don't think so...

" Does HOH come into play for either of us? I don't think so..."--->I don’ t think that your spouse can file her return as HOH; as she doesn’t pay more than half the cost of keeping up a home for the year. I guess you also can’t file your return as HOH UNLESS you paid more than half of the cost of keeping a home your parent, as your dependent relative, as you actually didn’t live with your children, as your dependents, in the same household for more than half of the year.To file your return as HOH, you are unmarried or "considered unmarried" on the last day of the year; you paid more than half the cost of keeping up a home for the year. A "qualifying person" lived with you in the home for more than half the year (except for temporary absences, such as school). However, if the "qualifying person" is your dependent parent as said above, he or she does not have to live with you. You are "considered unmarried for tax purposes if on the last of the year you are: unmarried;legally separated from your spouse under a divorce or separate maintenance decree, or married but lived apart from your spouse for at least the last six months of the year.

How about the fact that for the first 5 months of the year my kids DID live with me full time (while we were living under one roof)? So if I add that to the nearly equal half time during our separation (4 nights with her, 3 nights with me) then could I say over the entire year they were with me over half the time? My understanding is that there are advantages to one of us filing HOH, so I'm trying to see if/how I can make it work. I can see how she wouldn't qualify as I almost fully supported her household. If I were to qualify, where does that leave her filing status? Who claims dependents? Uggh...

“How about the fact that for the first 5 months of the year my kids DID live with me full time (while we were living under one roof?“ So if I add that to the nearly equal half time during our separation (4 nights with her, 3 nights with me) then could I say over the entire year they were with me over half the time?”--->Correct. As said previously, to file your return as HOH, your kids had to live with you for more than half the year. More than half a year means, at minimum, six months and one day. If you share custody, you may want to keep a log of where the child spends the night in your calendar or day planner.
“My understanding is that there are advantages to one of us filing HOH, so I'm trying to see if/how I can make it work.”---->Agreed; as you said, filing your return as HOH entitles you to a lower tax rate than if you file as single or married filing separately. In addition, when you qualify as head of household, your standard deduction is higher,$8,350, for 2010, reducing your AGI, Taxable income and tax liaiblity.I guess so; you need to try to file your return as HOH if you qualify the status.
“I can see how she wouldn't qualify as I almost fully supported her household.”---> Correct sa said previously.
“ If I were to qualify, where does that leave her filing status?”--->I am NOT sure if your psouse has any gross income to file her return( or if she needs to file her return for refund on her return last year or so.), then she needs to file her return as MFS; she can’t file her return as single UNLESS she is unmarried or legally separated from her spouse under a divorce or separate maintenance decree or she disqualifies for another filing status.
“Who claims dependents?”---> As long as you satisfy the domicile test as said above( since your children have the same principal place of abode as you for more than half of the tax year), then you can claim your children as your dependents. HOH filers MUST necessarily pay more than half of the cost of keeping a home for depenent child(children) or other qualifying dependent relative, parent(s) or other family relative(s), I mean. Your spouse, as she doesn’t pay more than half the cost of keeping up a home for the year, can’t claim her children as her dependents.

OK, this all makes sense now. The only problem is that I think I need to file an extension because this is all coming to me the day before Tax Day.

Last question (I think)...can I file an extension with my estimated tax based on MFJ status (one return) but then actually file two separate returns (me HOH, her MFS) when the time comes?

“.can I file an extension with my estimated tax based on MFJ status (one return) but then actually file two separate returns (me HOH, her MFS) when the time comes?”---> As far as I know, IN GENERAL, once you file a joint return,MFJ, then you cannot choose to file separate returns, MFS, for that year after the due date of the return. IRS tax laws , “ you CAN’T change the filing status from MFJ to MFS after the due date of the org return.” However, depending on the circumstances, for instance, what is causing you to want to separate the returns, you/ your spouse might be able to file either as an innocent spouse or an injured spouse even after the 1040-X window has slammed shut(depending on why you wants to separate the returns).One exception is that a personal representative for a decedent can change from a joint return elected by the surviving spouse to a separate return for the decedent within 1 year.