File a Joint Return or a Separate Return? What You Need to Know About Filing Income Taxes with Your Spouse

There are a number of decisions you’ll have to make as a married couple. What color are you going to paint the house? When’s the best time to have children? How many children are you going to have? Should you file your federal income tax return jointly or separately?

Maybe figuring out tax benefits isn’t the most pressing matter on the minds of a newlywed couple. However, it’s an important decision for married couples, as far as their tax situation goes.

Most couples file a joint tax return, merging both taxable incomes,deductions, and potential tax debts. Tax law changes have eased the marriage penalty, encouraging the trend to file joint returns, though it has not entirely disappeared. This “marriage penalty tax” tended to show up when married persons made roughly comparable incomes. In many cases, filing a combined income on a joint return would result in a greater tax debt and a smaller tax refund on their joint return as opposed to filing as a single taxpayer with their own itemized deductions, forcing the couple to pay more, an unnecessary financial hardship sometimes called a penalty.

Generally, the respective incomes of married taxpayers differ significantly. That means their joint income as married individuals is less than if the high-wage-earning spouse were to file as unmarried people. Given the favorable federal income tax rates for a one-income household, choosing a married filing joint status tends to result in a lower income tax bracket, potentially qualifying them for the biggest refund.

A clear picture of both your finances will allow you to minimize tax liabilities and possibly get a greater tax refund. Getting advice from tax experts is a great place to start when you’re trying to decide when filing a joint or separate return is best.

You’ll have to select your tax status when you file your annual tax return. The IRS has five tax filing status options:

• Single filing status
• Married filing jointly status
• Married filing separately status
• Head of household status
• Qualifying widow(er) status

Married couples will file their tax status as either married filing jointly or married filing separately.

Why does your tax filing status matter? Because your filing status will generally affect how much of your income is taxable. Along with qualifying for different income levels, the tax credit thresholds for individual income on a federal return may be more favorable for single filers than combining your incomes. If you’re trying to find the maximum refund (an admirable financial goal for any couple), then you and your spouse should determine which filing status would be best for the two of you.

There are definitely circumstances in which filing separately is warranted. Here are a few scenarios in which it might be best for couples to file separately:

• One spouse has a low income and lots of expenses that qualify for itemized deductions
• When each spouse wants to maintain control of his or her separate income
• When filing jointly doesn’t grant a significantly better tax break than filing separately
• When one spouse has questionable financial behavior
• When a marriage is ending

Separate returns can produce savings if one spouse has a lot of medical expenses and a low income. By filing separately, the partner with the medical bills may be able to exceed the 10% of adjusted gross income threshold needed to itemize medical expenses. Taxpayers 65 years or older may still use the 7.5% requirement for their tax filing, but the 10% threshold applies to everyone i. When filing jointly, only one person needs to satisfy the age requirement to receive a lower deduction percentage.

Couples sometimes elect to file separately when the taxes due on combined returns are comparable to taxes owed when filing on their own federal return. Filing separately allows each spouse to maintain responsibility for the accuracy of their own individual tax returns and the payment plans without any additional liability for unpaid taxes.

You can avoid wage garnishment if your spouse has unpaid taxes by filing separate federal returns. Wage garnishment can leave you very little disposable income because the federal government’s primary aim is paying off your tax debt and their definition of basic living expenses may differ from yours. If one spouse faces a significant tax debt, the other married taxpayer can avoid getting a wage levy if they were separate filers the previous year. Wage garnishment can severely hamper your financial situation, but by separately filing taxes, you can keep the tax debt limited to a single person instead of both your incomes being affected. However, the IRS can take hold of any community property, including joint bank accounts.

It is encouraged to file separately when your spouse practices questionable tax filing strategies. If it comes down to it, there is legal protection in place for spouses who are unaware of illicit activity; however, that spouse needs to have proof that they were truly not cognizant of any tax scheme. If you’re in such a situation, you can try to qualify for the innocent spouse relief to avoid the financial hardship.

It is also advised to file separately when a marriage is breaking down to avoid the hassle of sorting out tax costs later on.

Unfortunately, married filing separately taxpayers will generally owe more taxes because they fall into a higher tax rate bracket when they file separately. The standard deduction is generally lower for couples who file separately than for couples who file jointly.

Furthermore, couples filing separately

• Are disqualified from many tax deductions and credits because of the income limits for unmarried people
• Cannot deduct student debt and loan interest
• Are limited to a $1,500 capital loss deduction (as opposed to $3,000 for joint filers)

For most couples, it’s more financially advantageous to file federal returns jointly.

To file separately, you and your spouse must have been married by December 31 of the tax year for which you’re filing. Even if you were married on December 31, you can still choose the married filing separately status for the whole tax year.

There are a few life events that may enable you to change your filing status:

• If you legally separate from, or divorce your spouse during the tax year, you could start using the single or head of household filing status. (Make sure you have a copy of that divorce decree.)
• If your spouse passes away, you may use either the married filing jointly or filing separately status for the tax year in which your spouse died. After that, you may be able to file as a qualified widow(er) status if you’re eligible.

When you and your spouse file separately, only one parent can claim dependents. Typically, the parent that provides housing for the child during most of the tax year gets to claim the dependents and receive a tax break. After all, they paid for childcare expenses and the credit for income tax purposes goes to the spouse whose income would be driving the federal tax refund. If the dependents lived with both parents equally, then only the parent with the highest adjusted gross income can claim the child.

As a married couple, the married filing jointly status is of course the more common choice. This route qualifies you for a number of tax breaks, including:

• The earned income tax credit
• The deduction for Student loan interest
• Deductions for college tuition
• Child and Dependent Care Tax Credit, which lets you reclaim unreimbursed dependent care expenses like babysitting, daycare, etc.
• Traditional IRA deductions

Joint filers usually receive higher income thresholds for taxes and deductions, which means they can still qualify for certain tax breaks even when they’re making a larger amount of money. In turn, their federal tax refund adds up to more than if they were filing an individual return.

Filing jointly is particularly advantageous when one spouse makes more than the other. Combining household incomes can bring the spouse with the higher level of income into a lower tax bracket.

One of the best ways to determine whether you should file your return jointly or separately is to prepare your federal tax return both ways. Prepare your return as if you were filing jointly, and then do it as if you were filing separately. Then calculate your tax bill as a separate and as a joint filer before filing. Then, you’ll see a clear difference in the entire tax refund.

Be sure to double check your calculations, and compare each return when you’re finished. It’s safe to suggest that you should probably choose the filing status that offers you the best tax savings. This can be a tedious process compared to a simple tax filing, but it’s the best way to determine which will be the most lucrative filing status for you.

Remember: once you’ve filed your tax return as “married filing jointly,” you can’t amend it to file separately. You’re stuck with whichever filing status you choose.

Need some help making sure your separate or joint refund looks right before you file it? Contact a tax professional today for advice on choosing your filing status, and for other tax concerns.