When does it make sense for married folks to file separate tax returns?
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You and your spouse may be inseparable in your social circles, but when it comes to your tax return, it might be more beneficial to file separately.
Most couples file their return jointly, combining incomes and sharing deductions. Thanks to the 2015 U.S. Supreme Court ruling making same-sex marriages legal nationwide, there are even more married taxpayers deciding whether to file one federal 1040 or two returns as married filing separately.
The trend to file jointly also is encouraged in large part by tax-law changes during the past few years to ease the marriage penalty. This filing phenomenon tended to show up when working spouses made roughly equal incomes; in many cases, they paid more taxes on their combined return than did unmarried couples filing separate returns as single taxpayers, forcing the married pair to face a tax penalty. Tweaks to the tax brackets have helped ease this problem.
But sometimes it pays for couples to re-examine how they file. There definitely are instances when filing separately might be warranted.
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Togetherness or not?
Separate returns could produce tax savings if one spouse has a lot of medical expenses and a low income. By filing separately, the partner with the doctor bills might be more likely to exceed the 10 percent of adjusted gross income threshold needed to itemize medical costs. Taxpayers age 65 or older can still use the 7.5 percent threshold for their 2016 tax filing, but the 10 percent threshold applies to everyone in 2017. Only one spouse on a joint return must meet that age to get the lower deduction percentage.
If one spouse uses questionable tax-filing techniques, the other partner might be wise to insist on separate returns. When both partners sign a joint return, each is legally liable for the tax bill and any issues that might come up later. The IRS does offer innocent spouse protection, but the victimized partner must show he or she was, indeed, unaware of any tax scheme. Filing separately could afford more protection for you if the IRS comes around asking about a creative return.
And when a marriage is on the rocks, many couples decide to start splitting taxes even before the divorce decree is entered. This way they can avoid being tied together by tax issues after the marriage is over.
Not always a perfect union
But married filing separately could have some drawbacks.
Although the tax-rate disparities between single filers and married couples have been lessened in the two lowest tax brackets, spouses who file separately will find the tax rates for them aren’t as amenable in the upper ranges. In fact, a check of the tax brackets shows married-filing-separately taxpayers face the 28 percent, 33 percent, 35 percent and 39.6 percent brackets sooner than do other unmarried taxpayers.
For example, a single filer with taxable income of $90,000 in 2016 would pay a maximum tax rate of 25 percent. But a married taxpayer who earned that same amount and filed a separate return would see a portion of his income fall into the 28 percent bracket. And while a single filer can make up to $190,150 and stay in the 28 percent range, a married taxpayer filing separately jumps to the 33 percent bracket when her taxable income hits $115,726.
Deduction flexibility also is sacrificed. If one spouse itemizes, both must itemize, splitting the items to be listed on a separate Schedule A for each. That means a partner with few deductions couldn’t use the standard amount and might get cheated when it comes to reducing taxable income.
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Deduction, credit considerations
Many tax-cutting credits and deductions are forfeited when couples file separate 1040s. You can’t take the earned income tax credit, claim adoption expenses or child and dependent care costs, use educational tax credits or even deduct the interest you paid on a student loan if you’re married and filing separately. If you have children, you might find the child tax credit reduced because it phases out at different income limits for the various filing statuses. And the amount of capital losses you can deduct is cut in half.
The married filing separately rules are complicated further if you live in a community property state — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin. In these places, state law determines whether your income can be considered as separate or community for tax purposes. See IRS Publication 555, Community Property, for more information.
You should go ahead and figure your taxes as both joint and separate filers and use the method that produces the lower tax bill. But chances are, you’ll find joint filing will be your best choice.
And after all, aren’t taxes a tiny price to pay for love?