The Toughest Tax Season Question All Married Couples Must Ask
Tax day will be here sooner than you think, and you and your spouse want to claim as many credits and deductions as possible to lower your final tax bill. So, should you file jointly or separately?
That depends. In the vast majority of cases, filing jointly provides married couples with the greatest amount of tax breaks.
"The 'married filing separately' status is generally the least beneficial of the filing statuses," said Luis Rosa, a financial advisor with LGR Financial in White Plains, New York. "'Married filing separate' status loses the ability to claim some of the most common credits such as student loan interest, tuition and fees, child and dependent credits, and many others." (See also: 5 Important Tax Changes for 2016)
Why Filing Jointly Is (Usually) the Smart Move
Couples who file their taxes jointly will be able to claim a standard deduction amount of $12,600 when preparing their 2015 income taxes this year. Married couples who file separately will each get a standard deduction of $6,300.
Gail Rosen, a certified public accountant and president of Gail Rosen, CPA in Martinsville, New Jersey, gives a good example of how much married couples can save by filing jointly: If one spouse earns $75,000 of taxable income and the other earns $15,000, filing jointly instead of separately this April can save that couple $2,265 in taxes.
Filing jointly is especially beneficial when one spouse earns significantly more than the other, Rosen said. That's because the averaging effect of combining the two incomes can bring some of the money that couples earned out of a higher tax bracket.
Another big difference in filing jointly comes in the form of the extra tax credits that you can claim.
When couples file jointly they might, depending on their financial circumstances, qualify for multiple tax credits, including the earned income tax credit, child and dependent care tax credit, Lifetime Learning education tax credit, and the American Opportunity Act education credit. If couples have adopted, they can also qualify for adoption tax credits. Married couples filing separately lose the ability to claim these potentially valuable credits.
"Most of the time, filing separately is not going to offer as many attractive incentives," said Nicole Erwin, with Tax Defense Network in Jacksonville, Florida. "The types of deductions you would enjoy on a joint return may not be available, and your standard deduction is far lower when you file alone."
When Filing Separately Is the Right Move
While filing jointly is usually the right financial move, filing separately is a better financial choice for a smaller number of married couples.
Rosen said that filing separately often makes sense when one spouse has a significant amount of medical expenses, casualty losses, or miscellaneous itemized deductions. You can deduct medical expenses only after they pass 10% of your adjusted gross income for the year. The same holds true for casualty losses. Miscellaneous itemized deductions, which include investment expenses, unreimbursed employee expenses, and the costs involved in hiring others to prepare your tax return, are deductible after their combined total exceeds 2% of your adjusted gross income.
If these possible deductions are isolated on the return of just one spouse — which would happen when spouses are filing separately — then the couple would enjoy larger deductions. Rosen gives this example: If one spouse has $9,250 in medical expenses and the married couple's joint income is $90,000, then only $250 of these medical expenses can be deducted on a joint return. That's because 10% of $90,000 is $9,000, and $9,250 minus $9,000 comes out to $250.
But if the income of the spouse with the medical expenses is only $15,000, and that spouse files separately, the deduction rises to $7,750. That's because 10% of $15,000 is only $1,500, and $9,250 minus $1,500 equals $7,750.
Diane Vidal, an attorney with the Chester, New Jersey-based law firm of Iandoli & Edens, said that filing separately can also offer spouses protection when they suspect that their partner is committing tax fraud.
Vidal said that when married couples file separately, it's easier for one spouse to claim the "innocent spouse syndrome." That's a term used in divorce law to bring relief to innocent spouses who had no idea that their spouses were engaging in shady IRS practices, Vidal said.
But when couples file together, even spouses who had no clue that their partners were committing financial wrongdoings will most likely still be held accountable for their spouse's crimes. That's because the IRS will assume that when spouses file jointly, they both read and understood their filings. The IRS will then have the authority to pursue criminal action against both spouses.
"I truly believe that married couples, especially with those relationships that are on the rocks or heading toward a divorce, should file separately," Vidal said.
Do you and your spouse file jointly or separately?
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