Choose Most Advantageous Filing Status
Tax Considerations for When You Say “I Do”
No matter how much you earn or how you’ve filed your taxes in the past, as soon as you get married it has an impact on the way that you file your taxes. As far as the government is concerned, whether you get married on the first day of January or the last day of December, your filing status for the entire year converts over to married, leaving you to decide whether you want to file your taxes as married filing separately or married filing jointly. If you’ve filed taxes as unmarried in the past, the switch is likely to hold some good and bad surprises for you, regardless of which option you choose.
Though there are important differences between choosing to file jointly or separately, and some positives that can come from each, those who believe that they can get around the negative impacts of a specific status should know that the government has put specific tax code provisions in place for the sole purpose of preventing couples from trying to game the system.
Married Filing Jointly
Included among the most common negative outcomes of filing jointly are:
* Capital gains are taxed at a higher rate
* Combined income may push a couple into a higher tax bracket
* Higher income total triggers a tax on net investment income that is exclusive to higher tax brackets
* Child care credit may be reduced
* Amount that can be invested in a deductible IRA may be limited
* Social Security income is taxed
* Phasing out of itemized deductions and personal exemption deduction
* Reduction of Earned Income Tax Credit
* Eliminates or reduces itemized deductions for medical or miscellaneous expenses
Included among the most common positive outcomes of filing jointly are:
* Where only one spouse earns income, tax bracket may be lowered
* Non-working spouse adds the opportunity to take an additional exemption
* Non-working spouse may mean that higher-income limitations may be reduced or eliminated for the same amount of income that was being earned while unmarried
Married Filing Separately
Couples may consider filing separately because they believe that it will reduce their income tax liability, but in most cases the tax laws that have been established mean that doing so results in a higher combined income tax. This is because when filing separately, if either spouse itemizes then the other is required to do so, and is precluded from taking the standard deduction. Married filing separately will also have an impact on those couples that receive Social Security benefits. Where those filing jointly are able to avoid paying taxes on the benefits until half of the benefits plus other income exceeds $32,000. By contrast, those who choose to file their taxes separately while married have no such threshold: their Social Security benefits are taxed in their entirety.
Legal Considerations of a Married Filing Status
In addition to the economic considerations that come into play when deciding on a married filing status, couples should also be mindful of the fact that each status offers a different level of legal liability. Those who fire married filing jointly are both jointly and individually responsible for all of the liabilities of their taxes, including the tax itself and any interest or penalties that may be due. By contrast, those who file separately are each only responsible for their own tax liability.
Calculating the advantages and disadvantages of the different married tax status options can be a complicated job. For assistance in evaluating what choice makes the most sense for you as you embark on life together, call our office today.
There are many unique situations that arise when choosing the most advantageous filing status. If you have questions about any of this, or the tax impact of any other advanced planning, call our office today at (562) 445-3888.