You know that Frank Sinatra great “Love & Taxes?” Or those many romantic films that end with the couple riding off into the sunset, only to tumble into a large country bed with their tax returns? No? Us, neither. Fortunately for us all, the song “Love and Marriage” makes no reference to taxes and this part of married life tends to remain unscripted in film and TV. All the same, determining how to file is one important change you will have to address after getting married.
When does it make sense to file separately versus jointly? What factors do you need to take into consideration when determining how to file? We have created this cheat sheet to help you answer some of these basic questions and make the best decision for you and your spouse.
When Does The IRS Treat You as Married?
In general, the IRS will treat you as married for the tax year that you got married. So for the tax year 2018, it doesn’t matter if you got married on New Year’s Day or in December. You could have been married for a single day, even. But your marital status as of December 31, 2018 will determine whether the Taxman considers you single or married for the 2018 tax year–or any other.
When Filing Jointly Makes Sense
For most couples, filing taxes jointly once married makes sense. Couples who choose to do this will complete a single return together. Further, they must be aware that their combined income will be considered as a single unit. They must decide whether to itemize their deductions or take a standard deduction on this return. Fortunately, the IRS offers couples who file jointly one of the highest possible standard tax deductions. For tax year 2018, this standard deduction is $24,000–twice that offered to those who are married but filing separately.
Couples who file jointly are also eligible for certain tax credits that those who are filing separately may not receive. Examples of these credits include the following:
- The child and dependent care tax credit
- The adoption credit
- The Earned Income Credit
- Tax-free exclusion of U.S. bond interest and/or Social Security benefits
- The credit for the elderly and disabled
- The deduction for college tuition expenses and other higher education credits
- The student loan interest deduction
- Tax credits for Roth or Traditional IRA Contributions
When only one spouse is earning money from a job or other income source, filing jointly makes more sense. This scenario makes it easier for the spouse’s combined income to fit into a lower joint tax bracket. The couple may also take advantage of the non-earning spouse’s deduction when filing their return.
Potential Problems With Filing Jointly
Filing jointly is not without its potential drawbacks. When couples file jointly, their overall income will be higher. This can potentially push higher-earning couples into an even higher tax bracket. Usually, it should not–the tax brackets for couples who file jointly are typically lower than if those same couples were to file separately. However, if two higher-income spouses file together, they may find their combined income is high enough to create problems. Such problems can include the following:
- Higher capital gains rates
- Loss of some credits
- Reductions in credits including child care and Earned Income Tax Credits
- Limits on how much in Roth or Traditional IRA contributions may be deducted
- Taxation of a higher amount of Social Security income
- Reducing or capping certain deductions, including possibly medical deductions
- Losing the flexibility of choosing whether to itemize or take a general deduction.
Another matter to consider is that when you file jointly with your spouse, you are liable not just for what you report, but for what he or she reports as well. By virtue of filing together, you are now “jointly and severally liable” for the tax payment itself, any interest due, and any penalties due as well. This can remain true even if you later divorce that spouse.
When Filing Separately Make Sense
While filing jointly makes sense most of the time, there are occasions where it makes more sense to file your taxes separately. After all, each couple’s tax situation is unique. Two key examples of when it makes more sense for spouses to file separately include:
- When one partner has a substantial tax debt and the other does not.
- When one partner is eligible for a substantial deduction that could be limited by combining income and filing jointly.
The first situation is one where separately your liability from your partner’s has clear benefits. If your partner has been overstating income or knowingly making errors with deductions, you likely don’t want to be anywhere near that situation and this would be a good reason to file separately. The last thing you want is to get dragged in on a potential audit or tax dispute that you didn’t start. It may also be a good occasion to ask your partner some other pointed questions, but filing separately is at least a start.
There are a variety of scenarios that may meet the second criteria of one spouse being eligible for a substantial deduction that would mean the couple pays less overall by filing separately. Consider the following example. John and Mary are a couple in their late 60s. John’s income far exceeds Mary’s. He has continued to work his full-time job, while Mary has reduced to part-time hours awaiting retirement. Earlier this tax year, Mary had a major surgery earlier this year which cost approximately 20% of her personal adjusted gross income (AGI). Because of this fact, Mary could deduct the cost of her medical expenses if she and John opt of MFS status. If the two filed jointly, John’s income is so much larger that the medical expense would no longer meet the criteria for deduction: that it be larger than 10% of the AGI for the couple (if filing together) or Mary (if filing separately).
There are non-financial reasons why a couple may opt to file separately, as well. For instance, if one spouse is unable or unwilling to sign a return, or the couple is separated pending a divorce, filing separately may have some practical advantages.
Potential Problems With Married Filing Separately (MFS)
It is important to note that Married Filing Separately (MFS) is a different status altogether than filing as a single person. Partners who file separately must be aware of some limitations as well as potential drawbacks to filing in this manner.
First, spouses who are filing separately must either both take the general deduction of up to $12,000 (for tax year 2018) or both must itemize. One thing that is not permitted is for each spouse to do as he or she pleases–one cannot take the general deduction while the other itemizes. This “rule” is to prevent couples from making any substantial tax gains from simply filing separately. Similarly, the Internal Revenue Code also provides that taxpayers cannot “get around” the issues created by a higher income from filing jointly by filing separately.
Similarly, the couple who files separately waives their right to many of the deductions that couples who file jointly may take advantage of. For instance, couples who file separately must decide which spouse may lose the ability to deduct student loan interest altogether while capital loss deductions are limited to $ as opposed to the $13,000 couples filing jointly may deduct. The many kinds of tax credits listed above that are available for couples filing jointly would not be available to those filing separately. Social Security benefits are also affected. Couples who file jointly enjoy the fact that they are not taxed on their Social Security benefits until half of all benefits and other income received equals $32,000 or below. Every cent of Social Security income is taxed on a MFS return, however.
How Do I Know If Filing Separately or Jointly Is Best For My Situation?
There are two key things you can do when determining how to file your tax return. The first suggestion may sound like a bit of a headache, but it happens to be the only conclusive way you will know for sure whether your joint or separate return will in fact be cheaper. Prepare the return both ways, maximizing the benefits of each, then simply compare the costs. The other thing you can do, especially if going through the process of preparing your returns both ways is too time-consuming or demanding for your tastes, is get the opinion of a seasoned professional. A good tax professional can gather some basic information about both spouses and their incomes and generally tell which method will be best. He or she may also take the step of fully preparing both returns if the call is a close one.
Don’t Make Tax Decisions Alone: Get Help From Qualified Tax Professionals
As with all tax matters, it is wise to get the opinion of both an attorneys and a CPA familiar with your situation before making major decisions. If you have read all of this information and still are uncertain about the best way to file, or simply want to learn more about what your options are for minimizing your tax liabilities, feel free to contact the experts at Royal Legal Solutions today. We are all too happy to see where we can help you keep more of your hard-earned capital in your pocket by developing strategies that take the full scope of your tax situation into account.
Royal Legal Solutions has attorneys who are familiar with tax law on staff, and we also maintain professional relationships with CPAs who are sensitive to the needs of the real estate investor. schedule your consultation today.