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When it comes time to file taxes, the choice of filing jointly or separately usually comes to mind for most married couples. Filing separately means that each spouse chooses to file their earnings separately. A joint filing means preparing a single tax return with the combined income of both the spouses.
Too many couples decide their filing status without knowing all the facts, and rely on their own reasons. Some couples make purely emotional decisions or decisions in haste; Some couples just prefer to keep their finances separate. The decision usually requires a calculation, and if possible the calculation should be done by an experienced CPA firm.
Basically, the answer boils down to which filing status generates the lower tax bill. The lowest tax bill is usually the most important thing for customers; However, each of the spouses is responsible for declaring the tax on joint return.
Joint and several liability is a concept which means that the couple is liable in respect of the tax declared on the return. This is a concern if a spouse takes positions on the return that are overly aggressive and if the return is questioned, it is more likely to be changed than “not changed” by the IRS. Some spouses choose to file separate returns because they do not want to be held accountable for the actions of the other spouse.
In most cases, filing jointly provides the most tax savings. However, filing separately also offers potential tax savings. The deduction is calculated at different levels of income. When one spouse has a significant amount of medical expenses, casualty damages, or a miscellaneous itemized deduction; It’s time to consider crunching some numbers. These deductions are reduced by a certain percentage of adjusted gross income (AGI). Note that these deductions are available only if:
a) Medical Expenses:
The deduction is allowed when the amount of the medical expense exceeds 10% of AGI.
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For taxpayers over age 65, the deduction is allowed when the amount of the medical expense exceeds 7.5% of AGI.
b) Casualty loss deduction is allowed if the amount of loss exceeds 10% of AGI
c) Miscellaneous deductions, for example investment expenses, out-of-pocket employee expenses, and tax preparation fees, are deductible when the amount of the miscellaneous deductions exceeds 2% of AGI.
Example: A married couple has a combined income of Rs.200,000. The wife makes 160,000 and the husband makes 40,000. The husband’s knee was blown out, resulting in $24,000 in “out-of-pocket” medical expenses from the couple’s joint checking account.
married filing jointly
adjusted gross income
$200,000
medical expenses:
$24,000
Adjustment (10%*200,000)
($20,000)
allowable deduction
$4,000
married filing separately
adjusted gross income
$40,000
medical expenses:
$24,000
Adjustment (10%*40,000)
($4,000)
allowable deduction
$20,000
tax credits and benefits
There are several tax credits that are material and available only to married couples who file jointly. The Child and Dependent Care Credit, Adoption Expense Credit, American Opportunity Tax Credit, and Lifetime Learning Credit are only available to married couples who file jointly. IRA contributions may not be deductible if one of the spouses is covered by a retirement plan provided by his or her employer.
The decision to file jointly or separately also affects state and local tax returns and the total tax bill that needs to be considered. Savings on federal taxes can lead to an increase in state taxes and vice versa.
Tax laws are complex and it’s usually not easy to formulate a quick answer on when a couple should file separately. We hope this article was helpful. This article is an example for illustration purposes only and is intended as a general resource, not a recommendation.
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