When you get married major decisions and purchases are generally done jointly. But when it comes time to file taxes there may be some advantages to filing separately. Here are some instances in which it may benefit a married couple to file separate tax returns.
When filing a joint return each spouse is jointly and severally liable for the tax on your combined income including any additional tax that may be assessed by the IRS plus any interest and most penalties. In this case the IRS can come after either of you to collect the full amount due. There are provisions in the law that provide relief from joint and several liability but each of those provisions has its limitations. So if you want to be responsible for only the tax you owe you can file a separate return even if a joint return results in less tax.
For most married couples filing jointly generally offers the most tax savings especially where the spouses have different income levels. Averaging of the two incomes can bring some of it out of a higher tax bracket. When you file separately you do not go back to using the “single” rates that you used before you got married. Both spouses should use the “married filing separately” rates. These rates are not as favorable as the “single” rates and are based on brackets that are exactly half of the married filing jointly brackets. When you file separate returns you don’t get rid of the “marriage penalty” which requires some married couples to pay at a higher rate on their total marital income than they would pay if each spouse filed as single.
Tax savings are possible when filing separately if one spouse acquires significant medical expenses casualty loss or “miscellaneous itemized deductions.” Deductions will be reduced by a certain percentage of adjusted gross income (AGI) and medical expenses are deductible when they exceed 10% of AGI. Casualty losses must exceed 10% of AGI. If you have tax return preparation costs investment expenses or reimbursement expenses they are deductible to the extent that their combined total exceeds 2% of AGI because those are considered miscellaneous itemized deductions.
On each spouse’s return if these deductions are isolated that spouse’s lower or separate AGI as compared to the higher joint AGI can result in larger total deductions. For example assuming both spouses are under age 65 in the year 2014 if one spouse has $10000 in medical expenses and a joint income of $90000 then only $1000 is deductible on a joint return because 10% of $90000 is $9000 (and $10000 – $9000 = $1000). But if the income of the spouse with the medical expenses is separately only $15000 the deduction increases to $8500 on a separate return because 10% of $15000 is only $1500 (and $10000 – $1500 = $8500).
There are several tax factors that make it advisable to file a joint return. For example if you are seeking child and dependent care credit adoption expense credit American Opportunity tax credit and Lifetime learning credit these benefits are only available to a married couple on a joint return. You will also not be able to take credit for the elderly or disabled if you file separate returns unless you and your spouse lived apart for the entire year. Qualified education loan interest cannot be deducted unless a joint return is filed. You may not deduct contributions to your IRA if either you or your spouse was covered by an employer retirement plan and you file separate returns. Adoption assistance payments or any interest income from Series EE or I savings bonds that were used for higher education purposes cannot be excluded if you file separate returns.
If you are a married couple wondering how it best benefits you to file taxes contact Lindemeyer CPA in Louisville Kentucky and we will help you file your taxes efficiently with the maximum benefit to you financially.
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