Should Couples Choose Married Filing Separately or Jointly?

As people are getting their tax information together, one question we are frequently asked is whether a couple should choose “married filing separately” or “married filing jointly” on their taxes. The answer is dependent on several circumstances, so to help you choose the option that will save you the most money at tax time, we’re breaking down the differences you need to know when it’s time for tax preparation.

What Is the Difference Between Married Filing Separately and Jointly?

When a couple files jointly, this means all their income, assets, dependents, and deductions are combined and included on one tax return. Married, filing separately means that both parties file their own returns, keeping their individual income, investments, and property separate.

Why Choose Married Filing Jointly?

An overwhelming majority of married couples choose to file jointly. It’s easier, and the benefits include a lower tax rate and increased tax deductions, including the child tax credit and capital loss deductions, which are twice the amount than the threshold for filing separately. Married couples who file jointly can claim the following deductions:

• Earned Income Tax Credit (EITC) which benefits people with low to moderate incomes, providing up to $6,660 in tax credits.
• American Opportunity is a qualified education tax credit of up to $2,500 to help cover tuition and fees for post-secondary education.
• Lifetime Learning is another tax credit to cover education costs up to $2,000. It’s dependent on filing status and income, but you can’t claim this and the American Opportunity credit.
• Adoption Expenses
• Child and Dependent Care is a tax credit to help make up the costs of day care or child care.
• Student Loan Interest Deduction which allows you to deduct how much interest was paid on a student loan up to $2,000.

Leveraging a Roth IRA Retirement Account

The other main benefit to filing jointly is when it comes to your retirement account. Married couples who file together have significantly higher income eligibility thresholds for a Roth IRA. You can contribute to a Roth IRA if your modified adjusted gross joint income is less than $208,000. If you file separately and live together, you can only contribute if your income is below $10,000 per year.

Why Choose to File Separately?

Between more tax credits, higher thresholds to claim deductions, and beneficial retirement accounts, why would you choose married filing separately? Let’s look at the circumstances in which it’s beneficial to file separate returns.

Separating or Divorcing

The main reason for choosing this filing status is for legally married couples who are separated or in the middle of a divorce and who don’t wish to file a joint return.

Ethical Concerns

If one spouse suspects the other of unethical reporting, tax evasion, or a similar crime, it’s better to keep taxes separate. This will keep the law-abiding partner from being held liable for the other’s actions.

Both Spouses Are High-Income Earners

If both spouses earn similar high annual incomes, you may end up with a lower income tax rate than if you file jointly. On the other hand, couples with lower incomes may pay more if they file separately.

Large Amount of Medical Bills

If one spouse has high medical bills, it may be beneficial to file separately. In order to itemize your medical expenses, they have to exceed 7.5 percent of your adjusted gross income. If you earn $40,000, you can deduct medical bills over $3,000. On the other hand, if you make $40,000, and your spouse makes $100,000, you could only deduct anything over $10,500 if you file jointly.

In this case, the low income earner with the medical expenses could file with itemized deductions and the high earner could take the standard deduction and both would come out better.

Reduce Student Loan Payment

If you are using income based repayment to repay your student loans, filing separately can result in a lower payment plan.

Schedule a Tax Preparation Consultation

If you aren’t sure what filing status is right for you, we can help. We can look at your unique finances and run the numbers to determine the best option that will minimize your tax burden. We help individuals and businesses with tax preparation in the Raleigh, Durham, Wake Forest, and Cary areas. To learn more, give us a call at  (919) 872-0866 or fill out the form below to set up a consultation.