Which is Better: Married Filing Separate or Joint Return?
Is it ever better for married couples to file a separate tax return? Yes, there are times when a husband and wife will owe less tax by filing separately.
Benefits of Filing a Joint Return
The Internal Revenue Service (IRS) provides specific tax breaks to married couples who file joint returns. By doing this, the IRS incentivizes couples to combine their income and deductions on a joint tax return.
Married couples who file jointly can deduct a significant portion of their income right away on their return. Usually, they can deduct two exemption amounts from their stated income. They can also qualify more easily for tax credits such as the Child and Dependent Care Tax Credit, adoption expenses, the Earned Income Tax Credit, and education credits such as American Opportunity and Lifetime Learning.
Married couples filing jointly usually receive higher earnings thresholds for specific taxes and deductions. This often results in these couples being able to keep more of their income by qualifying for certain tax breaks and receiving a lower tax rate.
When Is It Better to File Separately?
But there are situations when it is better to file separately from your spouse. Married filing separately isn’t the same as filing as a single individual. This filing status means that the filer is married but not legally responsible for their spouse’s return, and each one’s income and expenses are considered separately.
Caution: There are some deductions and credits that you are not allowed to take at all if you are married filing a separate return. If in doubt, consult Tax Advisory Group, LLC.
Here are some examples of when it might be better for spouses to file separately:
When one spouse has spent a large amount out-of-pocket for medical expenses. Filing separately would allow that spouse to apply the IRS-imposed 10% threshold to only one income. For those over 65 and their spouses, the threshold of 7.5% is in effect until December 31, 2016. This allows the spouse to deduct unreimbursed medical expenses that exceed 7.5% (or 10%) of their adjusted gross income. It’s easier to meet the limit if there’s only one income on the return.
If the government may intercept your spouse’s tax return. If you are expecting a refund, and your spouse has already received notices that they are in default on a student loan, past due child support, or past due state or federal taxes, you might want to file separately to protect your tax refund.
If you have a lot of unearned income. The Affordable Care Act has added a new 3.8% tax on unearned income or passive income such as rental property income, capital gains, investment income, dividends or interest – when joint filers make more than $250,000 combined. The threshold for married filing separate is $125,000. It might save on taxes if the spouse that has unearned income makes less than $125,000 and files separately.
If you’re getting a divorce and it’s getting ugly. Even though you can still file jointly until your divorce decree is signed, it might save your sanity to go it alone. You might pay a little more in taxes, but it might be worth it.
Choosing whether to file jointly or separately from your spouse can be a complex decision. If in doubt, please give us a call. I could save you money by helping you to make the right decision.
