What type of tax filing works best for you and your spouse?
Q. What’s the difference between married filing jointly and married filing single? How can we decide which is the right choice?
A. A married couple has two choices when filing a federal or state income tax return. They can file Married Filing Jointly or Married Filing Separately.
When a couple files separately, they each file their own separate tax return. Each includes only their own income, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
“In the event of a joint account, interest, dividends and capital gains are split between them. Itemized deductions and dependents are also split,” Kiely said. “Each is responsible for their own tax and not the tax of their spouse.”
But by filing jointly, the couple combines their income, deductions and exemptions onto one tax form. The tax is calculated and the result is a balance due or a refund.
Kiely said the refund check will have both of the couple’s names on it, and if there is a balance due, the government doesn’t care who makes the payment.
“When a married couple files a joint return, they are both `jointly and severable liable’ for the tax due; plus any additional tax due as a result of a subsequent audit,” he said.
Kiely said he’s often asked if a couple could save some tax if they file separately. The straightforward answer, he said, is probably not.
He said the standard deduction for married filing separately is exactly half of that for married filing jointly, but the tax rates are actually skewed in favor of a joint return. (Unmarried singles do a little bit better.)
Kiely offered this example: Assume you had a married couple with identical incomes, each earning $75,000. If they filed separately, their individual tax would be $12,150 for a total tax of $24,150. If they filed jointly, their total tax would be $24,138, a $12 savings.
Many credits and deductions are more fully allowed under if you file jointly instead of separately, and would be limited or lost if you filed separately, said Cynthia Fusillo, a certified public accountant with Lassus Wherley in New Providence.
These include the student loan interest deduction, the deduction for net capital losses, the child and dependent care credit, the adoption credit and the deduction for college tuition expenses. And there are more.
But there could be times it makes more sense to file separately.
For example, Kiely said, in order to take a medical expense deduction, you must get over an income threshold. You can deduct the amount that exceeds 10 percent of your income, or 7.5 percent if you are over 65.
“It’s possible the medical expense does not exceed the couple’s combined income,” Kiely said. “But if the spouse with the medical expense has the lower of the two’s income, filing separately might help.”
There are other times when it could be advantageous to file separately so the spouse with the lower income can take advantage of deductions that might be impossible if you filed together.
Fusillo said casualty losses are deductible only to the extent they exceed 10 percent of adjusted gross income. And then there are charitable contributions, which have several different adjusted gross income limitations of 20, 30 and 50 percent.
“One caveat to this is that both spouses must itemize,” Fusillo said. “Ideally the spouse with the lower adjusted gross income is the one with the big deductions to maximize the benefits of such deductions.”
Another reason you might want to file separately is so that you are not responsible for what is reported on your better half’s return, Fusillo said.
“Filing separately means you are only responsible for the accuracy of and payment of tax on your own return,” she said. “Similar to this is if your spouse owes back taxes and there is a chance that the IRS may take the refund on the upcoming return to satisfy those back taxes.”
Filing separately would make sure that any refund you are owed is protected.
Kiely said he sometimes advises couples to file separately if their marriage is on shaky ground.
The issue here is the “jointly and severable liable” part.
Kiely said he had a client who was a school teacher. Her ex-husband was self-employed. They filed their last return jointly then they got divorced.
“The husband’s business was audited and it appears that his accounting was very questionable,” Kiely said. “Since he was now on disability and had virtually no income, my client got stuck with his tax bill. She was jointly liable.”
Kiely said there are times when wealthy couples who do not comingle their assets file separately, as do people with pre-nuptial agreements and people with multiple marriages.
You should sit down with a tax preparer to discuss the details of your situations so you can make the right decision for you.