By Michelle E. Botwinick, C.P.A.
I am often asked whether a couple should file a joint tax return or separate returns. As is often the case with tax questions, the answer depends on a couple’s particular tax picture.
In general, the decision will depend upon which filing status results in the lowest tax. But it is also important to note that, if a couple files a joint return, each spouse is jointly and severally liable for the tax on the couple’s combined income, including any additional tax that IRS assesses, plus interest and most penalties. This means that IRS can come after either spouse to collect the full amount. Although there are provisions in the law that offer relief from joint and several liability, each of those provisions has its limitations. Thus, even if a joint return results in less tax, a couple may choose to file a separate return if each spouse wants to be certain of being responsible only for their own tax.
In most cases, filing jointly offers the most tax savings, particularly where the spouses have different income levels. The “averaging” effect of combining the two incomes can bring some of it out of a higher tax bracket. For example, if one spouse has $75,000 of taxable income and the other has just $15,000, filing jointly instead of separately for 2010 can save $2,090.50 in taxes.
Note that filing separately doesn’t mean using the “single” rates that applied before marriage. Instead, each spouse must use the “married filing separately” rates. These rates are based on brackets that are exactly half of the married filing joint brackets but are still less favorable than the “single” rates. This means the “marriage penalty” (which requires some married couples to pay at a higher tax rate on the same total income than they would pay if each were single) isn’t eliminated by filing separate returns. Although Congress has provided relief from the marriage penalty in the tax rates, those changes don’t provide a complete solution.
There is a potential for tax savings from filing separately, however, where one spouse has significant amounts of medical expenses, casualty losses, or “miscellaneous itemized deductions.” These deductions are reduced by a percentage of adjusted gross income (AGI). Medical expenses are deductible only to the extent they exceed 7.5% of AGI, and casualty losses must exceed 10% of AGI. Miscellaneous itemized deductions, which include a variety of deductions such as investment expenses (other than investment interest), unreimbursed employee expenses, and tax return preparation costs, are deductible to the extent their combined total exceeds 2% of AGI (often referred to as a “2% floor”).
Other tax factors may point to the advisability of filing a joint return. For example, the child and dependent care credit, adoption expense credit, American Opportunity tax credit, and Lifetime learning credit are available to a married couple only on a joint return. And you can’t take the credit for the elderly or the disabled if you file separate returns unless you and your spouse lived apart for the entire year. Nor can you deduct qualified education loan interest unless a joint return is filed. You may also not be able to deduct contributions to your IRA if either you or your spouse was covered by an employer retirement plan and you file separate returns. Nor can you exclude adoption assistance payments or any interest income from series EE or Series I savings bonds that you used for higher education expenses if you file separate returns.
In addition, social security benefits may be more heavily taxed to a couple that files separately. The benefits are tax-free if your “provisional income” (your adjusted gross income with certain modifications plus half of your social security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return, but zero on separate return (or $25,000 if the spouses didn’t live together for the entire year).
Unfortunately, there aren’t any hard and fast rules of thumb for when it pays to file separately. The tax laws have grown so complex over the years that there are often a number of different factors at play for any given situation. However, there is one approach guaranteed to come up with the correct decision-ask your tax preparer to calculate your federal and state tax bills both ways: jointly and separately. Then the approach that leads to overall tax savings can be used.
Married? File Joint or Separate?
By Michelle E. Botwinick, C.P.A.