When you file your tax return, a tax filing status must be chosen. This status is used to determine your standard deduction, tax rates, eligibility for certain tax breaks and your correct tax.
The five filing statuses are:
Single
Married filing jointly
Married filing separately
Head of household
Qualifying surviving spouse
Whether to file joint or separate tax returns when married depends on various factors. In general, you should choose the filing status that results in the lowest tax. But keep in mind that, if you and your spouse file a joint return, each of you are “jointly and severally” liable for the tax on your combined income. And you’re both equally liable for any additional tax the IRS assesses (plus interest) and most penalties. That means the IRS can come after either of you to collect the full amount.
Here are some considerations to help you evaluate whether you and your spouse should file jointly or separately.
Income Level: If one spouse earns significantly more than the other, filing jointly may result in a lower overall tax burden due to income splitting and potentially lower tax rates.
Deductions and Credits: Evaluate which deductions and credits you qualify for individually and jointly. Sometimes, filing separately could allow one spouse to claim certain deductions or credits that wouldn't be available if filing jointly.
Tax Liability: Calculate your tax liability both ways – jointly and separately – to see which filing status results in lower taxes overall.
Eligibility for Tax Benefits: Some tax benefits, such as the Earned Income Tax Credit (EITC) and the Child and Dependent Care Credit, have different eligibility criteria depending on your filing status. Qualifications for certain credits will differ depending on your chosen filing status.
State Tax Considerations: State tax laws may vary, and the best filing status at the federal level might not be the same at the state level. Consider how your state taxes are affected by your filing status.
Complexity of Finances: If you have complex financial situations, such as owning a business or significant investments, consult a tax professional, like us, to determine the most advantageous filing status.
Potential for Future Changes: Consider your future plans and how they might affect your taxes. For example, if you plan to buy a house or have children, your tax situation could change significantly.
Legal Liabilities: In some cases, filing separately might protect one spouse from being liable for the other's tax debts or legal issues.
Benefits of Filing Separately
Even if a joint return results in less tax owed, some people may still choose to file separately to only be responsible for their own tax bill. This is common amongst separated couples. Another reason why couples might choose to file separately is if one spouse has significantly higher medical expenses. Medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, it should lower that spouse’s AGI which will result in a larger total deduction.
Benefits of Filing Jointly
Some tax breaks are only available on a joint return - the Child and Dependent Care Credit, Adoption Expense Credit, American Opportunity Tax Credit and Lifetime Learning Credit. Additionally, to take advantage of the elderly or the disabled credit, you and your spouse would need to have lived separately for the entire year for which your filing returns for. When it comes to Individual Retirement Account (IRA) contributions, the deductibility can be affected if you or your spouse are covered by an employer retirement plan, and you choose to file separate tax returns.
Also, social security benefits may be taxed less when married couples file jointly. Benefits are tax-free if your “provisional income” doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return, zero on separate returns, or $25,000 if you and your spouse live separately.
Your filing status may affect your state or local income tax bill, so the total tax impact should be compared. Consider the key factors listed above when deciding, and consult with your VAAS Pro Consultant to help you make the best decision for your situation.