For married couples, combining finances is a smart way to streamline expenses. But at tax time, couples face a tricky question: File jointly or separately?
Knowing which status to choose -- married filing jointly or married filing separately -- isn't always cut and dry. However, figuring out which way to go can result in many tax benefits. In most cases, married couples should file their taxes jointly in order to qualify for better tax breaks and ultimately reduce their overall tax liability, says Ryan Firth, a certified financial planner and president at Mercer Street, a financial planning firm. However, there are some circumstances when filing separately is the best option and both should be weighed carefully.
With that in mind, here's a primer on the key benefits and disadvantages of claiming a married filing separately or married filing jointly status. Read on to learn more about how to make the best tax-filing status decision for you and your spouse.
Reasons to File Jointly
1. You may qualify for a lower tax bracket.
If you earn a much higher income than your spouse (or vice versa), filing jointly often helps you qualify for a lower federal income tax bracket compared to brackets for married couples who file separately. This means you will owe a lower tax bill and may even get a refund. It's always a wise idea to crunch the numbers to determine which option provides the best outcome and the biggest tax savings. You can find the tax brackets for both filing statuses -- married filing jointly and married filing separately -- online to draw the comparison.
2. You will receive more credits and deductions.
Several tax credits and deductions are only available for married couples who file together, such as the earned income tax credit, child and dependent care credit, education credits, credit for adoption expenses and student loan interest deductions. If you're planning to take the standard deduction, couples who choose to file jointly will receive $24,400 as compared to just $12,200 for those married filing separately couples.
"The deductions and credits are much more favorable if you file married filing jointly, instead of married filing separately," says Sean W. Mullaney, financial planner at Mullaney Financial & Tax Inc., which offers fiduciary, fee-only, hourly and advice-only financial planning.
3. You can deduct a bigger capital loss.
If you're planning to claim a capital loss deduction, your limit is $3,000 when you choose to claim a married filing jointly status. Comparatively, this limit drops to $1,500 when filing separately and these savings can help reduce your overall tax bill.
4. You can deduct retirement account contributions.
A taxpayer's deduction for an IRA phases out when adjusted gross income is between $0 and $10,000 when filing separately, Firth says. However, if the couple files jointly, the phase-out range falls between a significantly higher adjusted gross income, between $103,000 and $203,000, depending on if the spouse is covered by a qualified plan.
5. It's more convenient and less expensive.
In addition to the tax-saving benefits for filing jointly as a married couple, preparing one tax return is ultimately easier and less expensive. If a couple files separately and one spouse has to itemize, the other partner is required to itemize as well. Plus, the fees you pay and the time it takes to file double when you file separately.
Reasons to File Separately
1. You have hefty medical bills.
If you experienced high out-of-pocket medical bills, filing separately may allow you to take a significant deduction. "You aren't able to deduct medical expenses until they exceed 10% of your adjusted gross income, so you may be better off to file separately so that the spouse with the lower income can deduct the medical expenses on their own return," says Ryan McInnis, founder of Picnic Tax, an online tax preparation platform powered by accountants where users can connect online directly to one of more than 300 verified certified public accountants.
For example, if you had $30,000 in out-of-pocket medical expenses and made $60,000, while your spouse made $300,000 with no out-of-pocket medical expenses, you'd have significant medical deductions if you filed separately. However, you wouldn't be able to deduct these expenses if you elected to file jointly since the total medical bills are less than 10% of your combined income. Ultimately, filing separately can help you or your spouse reach the threshold to deduct out-of-pocket health care expenses when applying it to just one income.
2. You don't want to be responsible for each other's tax liabilities.
When you file jointly with your spouse, you're on the hook for his or her tax bill. "By filing jointly, you effectively guarantee your spouse's tax bill at the end of the year and there are some circumstances, such as anticipated divorce or separation, in which one couple may feel uncomfortable doing so," McInnis says.
3. You or your spouse owes child support.
If either you or your spouse owe unpaid child support, filing separately can protect your refund from being offset by the IRS to pay the taxes on it. "Filing separately can protect one spouse's tax refund against the other's creditor claims," Mullaley says.
4. You want to keep your property and assets separate.
When each spouse has considerable assets and doesn't want to blend them, or they have children from a previous marriage and want to make sure their property is separate for passing down to their respective children, filing separately is key.
5. You have qualified business income.
If you or your spouse received qualified business income, filing jointly may mean you're phased out of receiving this deduction, Mullaley says. If one spouse has a large income and the other has a more modest, but still substantial, income that is mostly qualified business income of under $160,725 per IRS guidelines, filing separately ensures this can be claimed while lowering their overall tax bill, he says.
However, Mullaley warns, the new qualified business income deduction can become complicated quickly. Consulting with a tax professional can guide you to determining the best outcome.
6. You earn the same income as your spouse.
Figuring out how to qualify for a lower tax bracket is a numbers game, and when both spouses work and earn the same income, they may find they pay a lower tax bill if they file separately. This requires a comparison to see what they owe under both joint and separate filing statuses in order to see if their combined earnings put them into a higher tax bracket.
If you're still unsure of whether or not you and your spouse should file jointly or separately, prepare the tax return both ways to see what your net refund or balance due from each method is, Firth advises. "In most cases, they'll probably pay less in taxes by filing jointly, but for some couples, it might make sense to file separately," he says.