If you just got married, congratulations!
And now, deal with the bureaucracy…
It isn’t that bad, really. Marriage used to come with a significant penalty if you and your spouse both earned an income. The tax code used to benefit single-income families. Now, much of that disparity has gone away, and you are better off filing a joint tax return.
There are some situations where it makes sense to file separately, but these are rarer and more technical.
The best rule of thumb is to file a joint return. If you think you may have a situation where filing separately makes sense, then let’s talk; we can help you figure this out.
Why you should file a joint tax return
The IRS encourages couples to file a joint tax return, and there are several benefits to doing so.
First, as a couple, you qualify for twice the standard deduction and twice the capital loss deduction.
The standard deduction reduces your income by the amount of the deduction. If you are single or married, filing separately, the standard deduction for 2020 is $12,400; as a couple, that amount is $24,800. If you both earn enough to claim the standard deduction on your own, then filing jointly won’t make a difference.
However, if one of you leaves your job (voluntarily or involuntarily), then as a couple, you can reduce the remaining income by $24,800, so you retain that benefit.
The capital loss deduction limits the amount of capital loss you can use to reduce your income. As a single person or married filing separately, the total capital loss deduction you can claim is $1,500; a married couple can claim $3,000.
If you both have enough losses to claim the $1,500, there is no benefit to filing jointly. But if only one of you has losses, then as a couple, you can claim the combined $3,000 benefit.
Couples filing jointly also qualify for higher income thresholds for some credits and in some cases qualify for additional credits or higher deductions. These include:
- Earned Income Tax Credit.
- American Opportunity and Lifetime Learning Education Tax Credits
- Child and Dependent Care Tax Credit
- Adoption expenses.
- Tuition and fees deduction
- Student loan interest deduction
- Tax-free exclusion of U.S. bond interest
- Tax-free exclusion of Social Security benefits
If you are married and file separately this will exclude exlude you from these credits and deductions.
However, there are some situations in which filing separately can help you.
Many reasons center on lack of trust in the marriage and avoiding each other’s liabilities. For example, you may elect to file separately if:
You lack spousal consent
To file jointly, you must both sign the return. If your spouse cannot or will not sign the return for some reason, you should file separately.
You are concerned about your spouse’s tax liability:
If you earn much less than your spouse and you file a joint return, you are both on the hook for the joint tax bill. If you do not want responsibility for this tax bill, you would have to file separately.
Another liability concern may surface if the IRS is collecting bad debts, taxes, or penalties from your spouse and you do not want to have your income impacted. The IRS can collect tax debts or penalties from either of you – so there may be reasons to keep your responsibilities separated.
You are getting divorced or separated:
As you are separating, it may make sense to keep your tax filings separate. This way, you avoid a joint tax-bill, joint-refund, and any joint-liabilities.
Sometimes there can be a tax benefit, but this is rare.
One example of a tax benefit is if one of you faces high out-of-pocket medical expenses. Tax legislation allows you to deduct only the amount that exceeds 7.5% of your adjusted gross income. You or your spouse may qualify for a significant benefit based on their or your income alone, even if you do not qualify together.
If you have a $15,000 bill, for example, and you earn $75,000, then the $15,000 would be 20% of your income, and you would qualify for a $9,375 deduction. If you and your spouse earn $202,000 or more together, then you would no longer qualify for any deduction at all.
Making these calculations can be tricky, and you would want to weigh this against any benefit that you get from filing jointly.
What about the marriage penalty?
There used to be a bias built into the tax code against two-income married couples. Deductions, limits, and credits did not always double. Because of this, many two-income couples would lose benefits that they claimed individually.
This penalty has mostly gone away, and there is not more of a bias toward married couples. The actual benefit or penalty now depends heavily on your circumstance. In general, now, you will be better off filing jointly.
Would you like some help?
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