Married couples have two ways to file their federal income taxes: jointly and separately. But which is better? How do you know which filing method to choose?
The truth is, there are pros and cons to both filing methods and choosing the right one for you will depend solely upon your individual circumstances.
For example, while recent changes in tax laws have eased the pains of the marriage tax penalty, its repercussions still exist, particularly for couples who make close to the same income and fall into the 25% tax bracket. These couples will pay more in taxes as joint filers than they would if they filed separately.
That said, this scenario ends as the couples’ incomes grow. A married person filing separately will see part of his/her income breach higher tax brackets before a single person making the same amount. A single filer can make up to $160,850 for example, and remain in the 28% bracket with the first $77,100 of that income being taxed at the lower 25% rate. A married person filing separately will pay 28% in taxes on the first $97,925 and 33% for any income over that up to $174,850. Had this same married person filed jointly, they would have paid only 25% in taxes for the first $128,500 in income and then only 28% for anything over up to $195,850.
Obviously, couples making large amounts of money – particularly when one party makes substantially more than the other – may well benefit from filing jointly.
Another issue to consider is the accuracy of the return itself. When filing jointly, frequently one spouse or the other prepares the return for the couple. If that spouse uses questionable tactics and is caught, both spouses are on the hook since both spouses signed the return.
To protect yourself then, you need to establish what the IRS refers to as “innocent spouse protection”. To do this, you would need to be able to prove that you were unaware of the tactics in question and filing a separate tax return is a good way to accomplish this.
Certain credits and deductions are also waived when filing separately, such as the cost of dependant care, adoption expenses and the earned income credit. The child tax credit can also be reduced depending upon your income level. Claiming capital losses are drastically reduced (often by half) and the educational tax credits aren’t allowed for separate filers.
In addition, filers in community property states will have some difficulty filing separately as the state’s law governs how income is split.
Try both and compare! Most tax preparation software packages have the ability to calculate your taxes both ways and can show you the potential savings or losses from one filing method over another so it never hurts to see both sides before you file.