Filing Status and Tax Benefits
The vast majority of our clients that are married file a “married filing jointly” tax return. Deductions and exemptions are combined, the tax brackets can be more favorable, and of course it is more cost effective to file one return instead of two. The determination for filing jointly is whether or not you were married on the last day of the year. The qualifications for being “married” are determined at the state law level. On the reverse side, in North Carolina if you were legally separated at the end of 2014 you could filing a joint return or single return (head of household filing status may apply as well if you meet the requirements). Overall we would say that filing jointly is the most beneficial, for the most people. However, there are an increasing amount of instances where it would make sense to filing separately:
Income driven loan payment amounts have resulted in many couples filing separately. If a return is filed jointly then both spouses income are considered when determining the ability to pay and loan amount. If filed separately, the loan servicer only considers the individual with the student debt’s income to determine monthly payment. This can make a significant enough difference to offset the tax savings of filing jointly.
Medical and Miscellaneous Deductions
Miscellaneous itemized deductions can only be taken to the extent they exceed 2% of adjusted gross income. Medical deductions are only deductible to the extent they exceed 10% of adjusted gross income (unless 65 or older then the percentage is 7.5%). When couples combine their income a lot of times it makes these deductions impossible to take. If one individual had significant medical or miscellaneous deductions (unreimbursed employee expenses being the most common) it may be more advantageous to file separately with a lower income to take advantage of those.
If one spouse has significant unpaid debts to a governmental organization filing a separately return can protect the other spouse from their tax refunds being seized to satisfy payment. While relief can be requested if this happens filing jointly, it is important to know what debts are out there and how it may affect you. Filing a joint return also makes you liable for everything reported on that return including fraud or misreported information. If there is any question regarding a spouse’s ethics when it comes to taxes, filing separately protects you from their liability.
While these are the exception to the “married filing jointly” rule. They are important options to keep in mind. We can easily process a tax return as “married filing separately” to see if it will benefit our clients.