3/21/2012 2:31 PM ET|
Should spouses keep taxes separate?
If you're married, filing a joint return isn't necessarily the best move at tax time. In some circumstances, filing separately makes more sense.
If you're happily married, conventional wisdom says you should file a joint federal income tax return with your spouse. However, there are exceptions. Here's the story, starting with the basics.
Married at year's end equals married all year
Your marital status for federal income tax purposes generally depends on whether you were married as of Dec. 31 of the year in question. For example, say you got married near the end of 2011. As far as the Internal Revenue Service is concerned, you were married for all of last year. So your 2011 tax filing options are limited to: (1) filing jointly with your spouse by combining your income and deductions on one return for the entire year, or (2) using married filing separately status, which requires you and your spouse to file independently, showing your separate income and deductions for the entire year on your respective returns.
Why not file jointly?
Filing jointly will surely reduce the combined tax hit on you and your spouse. Right? Not necessarily. In many cases, the biggest reason to file jointly is because it eliminates the need to file two returns. In other words, joint filing is simply more convenient. You may not save a dime in taxes.
That said, filing jointly usually does lower your tax bill when one spouse earns a healthy amount of income while the other earns quite a bit less or nothing. The reason? The joint-filer tax brackets are exactly twice as wide as the MFS brackets. So when one spouse earns quite a bit and the other not so much, filing jointly will usually cut your tax bill because more of the higher-earning spouse's income gets taxed at lower rates. In this situation, the conventional wisdom is correct, and filing a joint return is the tax-smart option. Still, you should not reflexively reject the MFS option. It can save taxes in certain circumstances that could apply to you.
When and how to file separately
You should always check out the potential advantage of using MFS status whenever: (1) both you and your spouse have taxable income, and (2) at least one of you (preferably the person with the lower income) has significant itemized deductions that are limited by adjusted gross income. Basically, AGI is the sum of all your income items (salary, capital gains, dividends and so forth) reduced by non-itemized write-offs claimed on Page 1 of Form 1040 (retirement account contributions, alimony paid, job-related moving expenses and so on). When you use MFS status, you separately calculate your AGI and your spouse's AGI, and this can work to your advantage.
The three most common itemized write-offs that are limited by AGI are:
- Medical expenses (deductible only to the extent they exceed 7.5% of AGI).
- Personal casualty losses (deductible only to the extent they exceed 10% of AGI).
- Miscellaneous itemized expenses such as unreimbursed employee business expenses, fees for tax advice and preparation, and investment expenses (deductible only to the extent they exceed 2% of AGI).
When you have these types of expenses, filing separately can lead to tax-saving results, because the AGI numbers on your separate returns will be lower. Therefore, your allowable deductions for these types of expenses may be considerably higher if you file separately. Here's an example.
You and your husband both work. Your husband earns less. He also incurred $10,000 of uninsured medical expenses in 2011 (which he paid out of his own resources), while you had no medical expenses. Here are the federal income tax results for 2011 if you file jointly versus using MFS status.
|File Jointly||File using MFS status: husband||File using MFS status: wife|
|Adjusted gross income||$135,000||$55,000||$80,000|
|7.5% of AGI||$10,125||$4,125||None|
|Medical expenses deduction||None||$5,875||None|
|Other itemized deductions||($20,000)||($10,000)||($10,000)|
|Combined tax bill||$19,150||$17,681||$17,681|
Using MFS status would save you and your spouse a combined $1,469 ($19,150 minus $17,681), and all it takes to collect this benefit is filing separate federal returns (you may have to file separate state returns too).
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Before you get your hopes up . . .
Here's the rub: You and your spouse cannot just split up your income and deductions any way you want in order to maximize the MFS tax savings. Instead, state law determines how you must divide up your income and deductions.
The single most important factor is whether you live in one of the nine community property states (Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin). If you do, you may be unable to gain much benefit from filing separately because you will probably have to split most or all of your income and deductions 50/50.
If you live in one of the 41 non-community-property states or the District of Columbia, the general rule is that you and your spouse can each report the income you earn and the deductible expenses you pay on separate returns. (See IRS Publication 17 on the IRS website.) For instance, the tax savings in the preceding example can be collected as long as the husband paid all the medical bills out of his own account and split the other deductible expenses 50/50 with his wife (by paying them out of a joint account funded equally by both spouses, for example).
Beware of the dark side of filing separately
Beware: Using MFS status can disqualify you from a number of potentially valuable tax breaks. For instance, the following tax goodies are off-limits.
- The child and dependent care tax credit.
- The deduction for college tuition expenses.
- The American Opportunity and Lifetime Learning tax credits for higher education expenses.
- The college loan interest write-off.
- The deduction for up to $3,000 of net capital losses (the deduction is limited to only $1,500 on a separate return).
- The right to make a Roth IRA contribution if your separate AGI exceeds $10,000.
This is not a complete list. You should always "run the numbers" with your tax preparation software when evaluating whether MFS status might work for you.
If you live in a community property state
In the nine community property states, state law requires community income to be split 50/50 between the spouses. Therefore, you and your spouse must split community income down the middle if you use MFS status. Community income generally includes all income from wages and providing services (it doesn't matter which spouse actually earns the income). Community income also generally includes all income from community property assets -- those assets that are considered owned 50/50 under state law.
Deductible expenses paid out of community property funds must also be split 50/50 if you use MFS status. Deductible outlays paid out of separate property funds generally must be allocated to the spouse who paid them. (Separate property usually means assets acquired with funds from gifts and inheritances that you've kept separate from community property assets.)
If you use MFS status, each spouse can claim his or her own personal exemption ($3,700 for 2011) on his or her separate return. You can allocate exemption deductions for your dependent kids ($3,700 each for 2011) any way you want.
Because the typical outcome for community property state residents is that most or all income and deductions must be split 50/50, there is usually no tax-saving advantage from filing separate returns. Using MFS status is beneficial only when you're allowed to split income and deductions unequally, as illustrated in the example.
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My husband and I figured out that if we had divorced last year, we would owe approximately $4000 less in taxes. Way to support the family unit, USA!
Everyone agrees that our tax code is too convoluted. I've never met anyone who says it is a good system. I truly cannot comprehend those who are against a flat tax or national sales tax.
Between the two of us we make the national median income and all of our bills are the most incredibly average that you could imagine. We have two children at home that we claim. Honest to god, we are statistically the most joe average family I have ever seen. I don't know any other households that so closely conform to the national median on so many different metrics as we do.
And yet, for me and my wife, filing separate means we get a tax return. If we file jointly, we owe more at tax time. If the most average family in America must play weird semantic games with their taxes, I can only imagine how convoluted it is for others.
I have audited for over 20 years and can tell you that THE IRS AUDITOR is a fraud. While I no longer audit taxes, never in any of my years auditing taxes was I asked to "increase revenue." My focus was not on raking the average family over the coals to make sure they paid. My goal was to find these multi-millionaires and mega corporations who were hiding millions of dollars in revenue, thus forcing the tax burden away from themselves and on to the average american family.
Tax auditing is about correctness. I did not always assess additional taxes on an audit. There were even cases where I helped a taxpayer find money they had overpaid. thus getting them a refund.
Note to toldin - you are better off financially by filing seperately as two single. Married couples (per the IRS) pay more in taxes.
The writer needs to remember that explaining terms matters when using jargon. This is poorly written and would have been sent back to the sub's desk of the newspaper office. But being the internet age, we just try to be patronising: oh, you did not know what AGI is, and you have never heard of "personal casualty losses".
Sharpen up MSNBC, you are losing readers who want carefully written and thoroughly thought out articles worth their time.
If you are not edifying the reader, you do not deserve the reader's time.
as a gay married couple, we walk a fine line. Our state recognizes our marriage but federal doesn't. Luckily i am not working right now, by choice, and earned no money last year and my husband just filed head of household. When i start to work again it could get shaky on what exactly to do .
One way i would change the code, why are there unlimited dependents allowed? Why should someone pay no taxes just because they decided to have a bunch of kid? Limit the deductions to 3, if you want more kids, fine, but the tax payers shouldn't have to help pay for them.
Thanks, Yeah, i know we are better off , at least financially on taxes, filing as singles
It just gets confusing sometimes, we have to be careful to file correctly.
An example, he pays for my insurance through his company, if I have medical bills and we file separately, who claims the itemized medical deduction? Him, me or either?
It would just be so much easier to be recognized federally too
We are willing to pay more taxes! LOL
Another trap - if one itemizes, the other must also - even if the separate deductions are LESS than the standard deduction. If you use software like turbotax, there usually is a worksheet to determine which is better - MFJ vs MFS. However, if you're worried about legality of your spouses' deductions, it might be wirth filing separately to protect yourself from an audit.
Best advice, ask your CPA (like me) to run the numbers, then decide.
Anyone of average intelligence and income can figure out their taxes and fill out forms the IRS provides. The government provides a do it yourself information book and provides information regarding new deductions and changes. What you don't want to do is....wait until the last minute. You have made your own nightmare and deserve your fate. Going to a so called low cost expert to do your taxes is a big mistake. People that fill out your tax forms for you have no idea what their doing and really don't give a damn about getting you the deductions you deserve. Especially watch out for the so called 'former IRS' tax experts with inside contacts and information. Hey I used them and paid thousands of dollars to the government because of their mistakes and indifference. If your in the upper income brackets you can afford the really good and knowledgeable tax accountants. Then.........it really makes sense to do so. The grubby congressional candidate with big ideas about simplifying the tax system are only trying to get re-elected. They really don't give a damn about you. Ain't it the truth ?
I HOPE I CAN SAY MY PEACE HERE WE AUDITORS ARE UNDER SO MUCH PRESSURE TO RAISE REVENUE , YOU HAVE NO IDEA HOW GUT WRENCHING IT IS TO RAPE A FAMILY I MEAN RAKE OVER A FAMILY OR PEOPLE FOR EVERY NICKEL AND DIME WE CAN GET.
LOOK YOU BETTER ADD SOME EXTRA TO THE TAX YOU OWE CAUSE WE' RE GOING TO FIND WHAT YOU MISSED AND YOUR GOING TO PAY 100% TAX PLUS PENALTIES AND WITH FRAUD IN THE PICTURE YOUR GOING TO WISHED YOU WERE DEAD. AND FRANKLY ON MANY OCCASION PEOPLE COMMIT SUICIDE JUST TO KEEP FROM HAVING TO PAY . BUT GUESS WHAT WERE GOING TO STILL GET IT AND IF NOT FROM YOU, YOUR CHILDREN AND GRAND CHILDREN . REMEMBER THE IRS DOES NOT FORGET. YOU BETTER PAY UP. WE ARE PEOPLE JUST LIKE YOU BUT WE HAVE TO DO WHAT WE ARE PAID TO DO. SOMETIMES I JUST WANT TO KILL MYSELF, WITH THE PAIN I'VE CAUSED. LOOK IF YOUR AUDITED DON'T REPRESENT YOURSELF HIRE ONE OF US THE CPA'S. THAT'S WHAT HAPPENS TO IRS PEOPLE WHEN THEY FINALLY GET SICK AND TIRED OF BEING THE BAD GUY. I HOPE I DON'T GET FIRED OR WORSE FIRING SQUAD FOR SPOUTING. BUT I'VE HAD ENOUGH. I WANT OUT AND WELL I REALLY FEEL YOUR PAIN. LOOK WHEN YOUR AUDITED WE DON'T ALLOW ANY DEDUCTIONS ON UNREPORTED INCOME SO FOR PETE SAKE WHAT EVER YOU DO DON'T CHEAT. REPORT EVERYTHING EVEN BORROWED MONEY YOU DON'T PAY BACK. JUST TO BE ON THE SAFE SIDE ADD 1% MORE TO YOUR RETURN BETTER TO PAY TO MUCH THAN TO LITTLE. WE ARE LOOKING FOR CHEATERS AND WE WILL FIND YOU EVEN IF YOU CAN'T PAY, WE ARE GOING TO FIND YOU. JUST DON'T RISK IT. I KNOW IT'S NOT FAIR TAX BUT IF ALL YOU TAX PAYERS DEMAND A FLAT TAX JUST MAYBE I CAN FIND A MORE FULFILLING JOB HELPING PEOPLE LIKE YOU CRUNCH INVESTMENT DOLLARS INTO AN AWESOME RETURN ON YOUR INVESTMENTS. ONE MORE THING THE GOVERNMENT SHOULD BE SELF SUFFICIENT AND NOBODY IN GOVERNMENT SHOULD BE MAKING MORE THAN A COMPARABLE PRIVATE SECTOR JOB THAT IS WASTE AND CORRUPTION IN MY OPINION. ALL N ALL US AUDITORS MAKE YOUR LIFE FRIGHTENING AND MISERABLE SO YOU KEEP PAYING SO ALL GOV. WORKERS GET RAISES AND BENEFITS BETTER THAN THE PRIVATE SECTOR. JUST KEEP PAYING WE GOT A LIFE TOO. I HOPE I AM STILL AROUND AFTER THIS GETS OUT WISH ME LUCK . MAY GOD BLESS AMERICA!
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