Yes, this is this time of year, tax season. For many married couples, filing jointly is a good idea, but there times when you might decide to file separately from your spouse.
Ninety-five percent of married couples file joint federal tax returns
Filing jointly can be convenient. Frequently, there’s a financial advantage, but that does not mean it should be done without consideration.1
Years ago, there was less incentive to file jointly. That was because the “marriage penalty” for doing so was effectively greater. There is no written “marriage penalty” in the Internal Revenue Code, but, in the past, income tax brackets were structured a bit differently and spouses having similar annual incomes sometimes paid more taxes by filing jointly than single taxpayers did.
There are many good reasons to file jointly
Nearly all of them involve saving money. Joint filing may give you an effective tax break right off the bat. Currently, married taxpayers who file separately face the 28%, 33%, 35%, and 39.6% income tax brackets at lower income thresholds than other unmarried taxpayers.2
Joint filers can claim significant tax credits that marrieds filing separately cannot
If you want to claim the American Opportunity Tax Credit, the Lifetime Learning Credit, the Elderly or Disabled Credit, or the Earned Income Tax Credit (EITC), you have to file jointly. Joint filing also gives you the potential to claim the full Child Tax Credit, rather than a reduced one.3
Deductions, too, decrease when you file separately as a married couple
Standard deductions fall significantly. Phase-out ranges affect itemized deductions, and some itemized deductions are unavailable for married couples who do not file jointly. Couples who file separate 1040s can only deduct 50% of the capital gains losses joint filers can. In addition, if one spouse elects to itemize deductions, so must the other (there must be a separate Schedule A for each spouse). The spouse with fewer deductions has no ability to use the standard deduction to lower his or her taxable income.2,3
Joint filing even helps you with regard to the Alternative Minimum Tax
When you file separately as a married couple, your AMT exemption falls by 50%. So you may be more susceptible to the AMT if you file separately. If the AMT affects you, you will find many federal tax deductions reduced or unavailable to you.3
Do you live in a community property state?
If you do, you may know that state tax law defines what is considered separately held or jointly held property. If you want to itemize deductions in a community property state, the paperwork can be onerous.3
More of your Social Security benefits may be taxed if you file separately
Social Security gives you a “base exemption,” an income threshold above which Social Security benefits may be taxable. The base exemption for married couples filing jointly is $32,000, meaning that if 50% of the Social Security benefits you receive in a tax year plus your other income in a tax year exceeds $32,000, taxes may apply. The base exemption for married couples filing separately who live together at any time during the tax year is $0. It improves to $25,000 for married couples filing separately who live apart for an entire year.4
You might be interested: 4 Steps to deal with sudden retirement when forced to retire early
So why would you not file jointly when married?
In certain circumstances, filing separately may be wiser.
Maybe you do not trust your spouse financially
If your spouse is a tax cheat or interprets federal tax law very loosely, filing jointly could prove hazardous in the case of an audit or other troubles. Both spouses must sign a joint return, meaning that both spouses are legally responsible for all taxes, penalties, and fines linked to that return. Yes, an innocent spouse may be offered tax protection by the IRS, but that innocence must be proven.2,3
Maybe you or your spouse have large out-of-pocket medical expenses
If so, and if the spouse contending with such bills earns much less than the other, there may be merit in filing separately. By doing so, the spouse with far less income might have an opportunity to meet the 10% AGI threshold needed to itemize medical expenses. (The 7.5% AGI threshold for itemizing these costs is still in place for taxpayers age 65 and older.)2
Maybe you are separating or divorcing. If that is the case, then it may seem only natural to begin filing separately while still married. Doing so now may lessen the chance of the two of you wading through tax issues in the aftermath of a split.
If you are unsure about whether to file jointly or singly, you can ask a tax professional for his or her opinion. Or, that professional can look at last year’s return and run the numbers for you. Most couples find that filing jointly works out best, but there are exceptions.
Aquiles Larrea Jr., AIF® may be reached at 212-390-8918 or firstname.lastname@example.org.
Should we continue the conversation?
To set up an exclusive strategy session fill out this form:[contact-form-7 404 "Not Found"]