What filing status should I choose?

A taxpayer's filing status for the year is typically dependent upon his or her marital status at the end of the tax year. As a result, if you are married on the last day of the tax year, you will be treated as married for the entire year.

Married couples have the option to file taxes jointly or separately. Both statuses can cause surprise results for individuals who have previously filed as unmarried. The surprises can be good and bad.

Individuals who file jointly must combine their incomes, and if both spouses work, combining income can result in many unpleasant surprises, as the many tax benefits are eliminated or are reduced for higher-income taxpayers.

The following issues are some of the most common problems caused by higher incomes:

  • Being put into a higher tax bracket
  • Having capital gains taxed at higher rates
  • Lowering the child care credit
  • Reducing the deductible IRA amount
  • Triggering a tax on net investment income that is only applicable to higher-income taxpayers
  • Taxation of Social Security income
  • Lowering the Earned Income Tax Credit
  • Lowering or doing away with the medical and/or miscellaneous itemized deductions
  • Phasing out the overall itemized deductions
  • Phasing out the personal exemption deduction

Filing separately typically can not resolve the aforementioned problems because of the provisions provided in the tax code that prevent married taxpayers from getting out of the loss of tax benefits that are applicable to higher-income taxpayers by filing separately.

In contrast, if only one spouse earns income, filing jointly can typically result in less tax because of the lower joint tax brackets and the additional exemption that has been provided by the spouse who does not work. In addition, a portion of the higher-income limitations that can apply to an unmarried individual with the same amount of income could be reduced or eliminated on a joint return.

Filing tax returns as married but separate will typically result in higher combined income tax for taxpayers who are married. The tax laws are specifically written to stop married taxpayers from filing separately in order to circumvent the limitation that is applicable if they filed jointly. For example, if the couple files separately, the tax code requires each person to itemize their deductions and if one or the other itemizes, the other is not permitted to take the standard deduction.

An additional example shows how a married couple's Social Security (SS) benefits are taxed: on a joint return, none of the SS income is taxed until half of the SS benefits in addition to other income is greater than $32,000. On a married-but-separate return, the taxable threshold is lowered to zero.

In addition to the tax, another concern that married couples should be aware of when selecting their filing status is that when married taxpayers file jointly, they become jointly and individually responsible (this is often referred to as "jointly and severally liable") for the tax and interest or penalties due on their returns.

This becomes true even if they divorce later. When using the married-but-separate filing status, each spouse becomes responsible only for his or her own tax liability.

If you would like to review how marriage can affect your tax liability before you get married, please contact us for further assistance, call us at (540) 678-9497 for a consultation!