Whether it’s something as simple as picking a restaurant or as complex as deciding whether to have children, marriage requires lots of mutual decision-making.
Couples who tie the knot will have another choice to add to that growing list next tax season, as they can either file joint or separate returns. This choice can affect the amount of taxes they owe or the size of their refunds.
Here’s a closer look at these two options and how to determine which filing status is best for you and your spouse.
If married couples file jointly, they’ll only have to fill out and submit a single return in which their incomes and exemptions, including tax credits and deductions, are combined.
Joint filers might qualify for several potentially significant tax deductions and credits, such as the earned income tax credit, the child tax credit and the child and dependent care tax credits.
Retirement fund contribution deductions are higher for couples filing jointly, as is their standard deduction.
Most married couples tend to file jointly, especially if one partner earns significantly more than the other. The person with the more modest income may pull the higher earner down into a lower tax bracket, resulting in a lower overall tax bill than if they’d filed separately.
Just keep in mind that filing jointly makes each person equally liable for the accuracy of the return. To avoid being hit with penalties, make sure to check your forms at least twice for mistakes and oversights.
Although separate filers miss out on these benefits, there are a couple of big advantages to filing separately depending on your individual situation.
Let’s say your spouse paid a costly out-of-pocket medical expense in the past year. Naturally, your partner would want to claim that expense on his or her tax return. If you’re filing jointly, the IRS would only allow your spouse to deduct the amount of those costs that surpasses 10% of your joint adjusted gross income, or AGI. For example, if you earned $70,000 and your spouse made $30,000, leaving you with a combined AGI of $100,000, your spouse wouldn’t be able to claim a benefit on an expense as high as $9,500. In that case, filing separately would make more sense because your spouse could claim benefits on expenses that exceed $3,000.
Also, couples who earn about the same income might want to consider filing separately, as combining their incomes could push them into a higher tax bracket.
THE BOTTOM LINE
Since filing separately can hamper a couple’s ability to take advantage of deductions and tax credits, most married people end up completing joint returns. That said, if you know you won’t qualify for many deductions or credits in the first place, it might be worth preparing returns using both statuses and seeing which one yields a larger refund.
Just as crowdsourced review websites can help you pick a decent restaurant, selecting a filing status isn’t a decision you and your spouse need to make alone. Certified financial planners and tax-preparation software can help steer you in the right direction.
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