When tax time rolls around, opting to file jointly or separately is something that usually crosses the minds of most married couples. Filing separately means each spouse opts to file their separate earnings. A joint filing means preparing a single tax return with both spouse’s combined income.
A lot of couples decide their filing status without knowing all the facts, and rely on their own reasons. Some couples make purely emotional decisions or hasty decisions; some couples just favor to keep their finances separate. The decision usually requires calculations, and if possible the calculations should be done by an experienced CPA firm.
Basically, the answer boils down to which filing status produces a lower tax bill. The lowest tax bill is usually the most important thing to the clients; however each spouse is responsible for the tax declared on a joint return.
Joint and several liability is a concept that means the couple is liable with respect to the tax declared on the return. This is a concern if one spouse takes positions on the return that are overly aggressive and if the return were questioned, it is more likely to be changed than “not changed” by the IRS. Some spouses opt to file a separate return because they do not want the liability for the other spouse’s actions.
In most cases, filing jointly offers the most tax savings. However, there is also a potential tax savings from filing separately. Deductions are calculated on various levels of income. When one spouse has significant amounts of medical expenses, casualty losses, or miscellaneous itemized deductions; this is a time to consider crunching some numbers. These deductions are reduced by a certain percentage of adjusted gross income (AGI). Note that these deductions are only to be deducted when:
a) Medical expenses:
· Deduction is allowed when the amount of the medical expenses is greater than 10% of AGI
For taxpayers over age 65 the deduction is allowed when the amount of the medical expenses is greater than 7.5% of AGI.
b) Casualty losses deductions are allowed when the amount of the loss is greater than 10% of AGI
c) Miscellaneous deductions for example investment expenses, out-of-pocket employee expenses, and tax preparation fees, are deductible when the amount of the miscellaneous deductions is greater than 2% of AGI.
Example: A Married couple has combined income of 200,000. The wife makes 160,000 and the husband makes 40,000. The husband had a torn knee that resulted in 24,000 of “out-of-pocket” medical expenses that came out of the couple’s joint checking account.
Married Filing Jointly
Adjusted Gross Income
Married Filing Separately
Adjusted Gross Income
Tax Credits and Benefits
There are several tax credits that are material and only available to married couples that file jointly. The child and dependent care credit, adoption expense credit, American opportunity tax credit, and lifetime learning credit are only available to married couples that file jointly. IRA contributions may not be deductible if one of the spouses is covered by a retirement plan provided by their employer.
The decision to file jointly or separately also influences state and local tax returns and the total tax bill needs to be considered. Saving on federal taxes might be counteracted by an increase in state taxes and vice versa.
The tax laws are complex and usually it is not easy to formulate a quick answer when a couple should file separately. We hope this article was helpful. This article is an example for purposes of illustration only and is intended as a general resource, not a recommendation.