You and your honey share everything: a bed, your home, and sometimes even food. But should you share a tax return? If you’re newly married, or even if you’ve been married for a while, one question that will come up is whether or not to file a joint return. It’s important to choose your filing status carefully since it will affect your deductions and tax credits.
Here are some pros and cons that may help you decide whether or not to file jointly.
You’ll be legally responsible for your spouse’s misdeeds
If your spouse is a tax cheat, you’re better off filing separately. There are many ways to show love and support for your spouse, but pulling a Bonnie and Clyde won’t impress the Internal Revenue Service.
“Filing jointly has deeper implications if the spouses have different codes of ethics. For example, if one likes to overlook cash income or heap on questionable deductions, both could wind up in trouble with the government. In addition, any errors or problems on the joint return could result in both being liable and having to pay penalties and interest,” says Chan.
You might not be able to take advantage of deductions for medical costs
If you or your spouse calls the emergency room a second home, you should think about filing separate tax returns. If you have unreimbursed allowable medical and dental expenses that are more than 10% of your adjusted gross income, you can claim a deduction. However, a combined income would most likely make eligibility much more difficult.
“Some situations financially justify filing separately. If someone has major medical expenses, sometimes it might be easier to deduct them when they constitute a significant percentage of the adjusted gross income. If a joint return is filed, it may be harder to meet the income requirement. Likewise, a large amount of itemized deductions can trigger more tax savings when they have a greater cost than a certain percentage of one person’s income,” says Chan.
Higher income ceiling
If you file with your beloved, you’ll get to enjoy higher income thresholds for tax deductions and retirement contributions. For example, those who are married filing jointly are allowed to earn an income of up to $191,000 and still qualify to make Roth IRA contributions. However, those married filing separately are unable to contribute once they go past a much lower ceiling of $9,999.
Lower tax bracket
If both you and your spouse earn an income and one makes significantly more than the other, your best bet might be to file jointly. This is because the higher earner might be able to benefit from the combined earnings being placed in a lower tax bracket. Married couples filing separately, on the other hand, are often placed in a higher tax bracket quicker than their counterparts who choose to file jointly.
“The tax rate schedule has some married people who file separately paying into higher tax brackets sooner than couples who file joint a return. This phenomenon typically occurs for people who earn higher income,” says Certified Public Accountant Stephen Chan.
Student loan interest deduction eligibility
Married couples filing jointly are the winners when it comes to deducting student loan interest. Lovebirds who have chosen to intertwine their taxes can deduct up to $2,500. However, if you’ve decided to file separately, neither you nor your spouse can claim the student loan interest deduction.
“There’s a possibility you could be considered unmarried for tax purposes. For example, if you lived apart from your spouse for the last 6 months of the year. This might give you the option of filing as Head of Household (if you have a dependent child). This becomes relatively complicated, but it could work out with a better overall tax outcome,” says Jim Blankenship, an enrolled agent, certified financial planner, and founder of Blankenship Financial Planning.
More tax credits and deductions
Chan says, “Filing separately or jointly can trigger or negate various tax credits and deductions. For example, married couples filing jointly have access to credits for child and dependent care, adoption expenses, and various credits for education expenses.”
Furthermore, couples filing a separate return may not be able to qualify for a deduction on IRA contributions if either spouse contributes to an employer-sponsored retirement plan. “Taxes on Social Security benefits can also be impacted negatively by filing separately,” adds Chan.
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