Doing my taxes has always been something that I dread as a freelancer. There’s far more paperwork involved than there was when I was a salaried employee, and I need to devote time to carefully itemizing (and backing up with receipts) any qualifying deductions to lessen my tax burden.
But this year I’ve been thrown a curveball: In 2018, I got married.
Should my husband and I file jointly or separately? I have no idea.
So, I asked tax professionals how spouses should file, and what types of situations inform the best choice.
When and Why To File Jointly
Though there are reasons to file separately, which we explore below, filing jointly is often the best course for married couples.
“There are penalties; associated with filing separate in the way various phaseouts and limitations are applied,” says Marianela Collado, CPA/PFS, CFP, co-owner of Tobias Financial Advisors in Florida.
To be clear, you’re not directly penalized for filing separately, but you are forbidden from taking tax breaks that would otherwise be available to you. Here are some good reasons to file jointly.
You want to qualify for more tax deductions and credits (including for student loans)
“In most cases, it is more advantageous to file jointly because doing so gives you access to more tax deductions and credits than you would filing separately,” says Riley Adams, a licensed CPA in Louisiana, and author of the personal finance blog, Young and the Invested.
“Most benefits tied to education expenses are granted to couples only when they file jointly, such as the American Opportunity Tax Credit (worth up to $2,500), Lifetime Learning Credit (up to $2,000) and the student loan interest tax deduction [up to $2,500 of the interest paid in the past year on a qualified student loan]. Filing separately means you can't claim these items on your return.”
Adams notes that filing jointly has the potential to change your discretionary income used for calculating your minimum monthly student loan payments — meaning the minimum could go up; “however, you also have access to the additional tax credits and tax deductions mentioned.”
Other deductions and credits you can qualify for when you file jointly but can’t access when filing separately (though certain exceptions may apply, do discuss with your accountant to be sure) include:
- Child and Dependent Care Tax Credit
- Credit for the Elderly or Disabled
- Earned Income Tax Credit
- Exclusion or credit for adoption expenses
- Tax-free exclusion of Social Security benefits
- Tax-free exclusion of U.S. bond interest
You don’t want to be taxed on all social security income
“Normally up to 85 percent of social security income is subject to income tax for married folks if you have income in excess of $44,000,” says Collado. “But if you file separately and live with your spouse that threshold drops to zero, meaning no matter how much income you have, you will be paying tax on up to 85 percent of your social security income.”
You want to contribute to a Roth IRA
“A big savings vehicle we love is the Roth IRA,” says Collado. “The IRS eliminates this opportunity if you file separately.”
If you are married filing jointly making under $199,000 combined that year, you can contribute to a Roth IRA, but if you file separately, “any dollar of income you have over $10k is phased out, meaning that even if you only make $20k, you can’t make a ROTH IRA contribution.”
You want to leverage your spouse’s financial loss (or vice versa)
Let’s say you’re making good money, but your husband is an entrepreneur who hasn’t started making profits yet. By filing jointly (and again, marrying your income), you’re essentially able to recoup his losses with your tax holdings.
“A real life example I caught was with a client who runs a restaurant who tends to have losses,” says Collado. “He and his wife, a teacher [making steady income], didn’t know that filing joint allows you to par those losses from his portfolio with her gains [as a salaried worker]. By filing jointly, you can leverage each other's separate situations to get a joint benefit.”
The downside is that the teacher in this scenario — who may have been used to getting a fat refund — is now compromising that by using her gains to offset her husband’s losses.
“Some people are upset by this and do not want to commingle funds, but I still usually encourage to file jointly because overall it will help reduce your tax liability.”
Ultimately, you can maximize your capital loss by filing jointly.
“Capital loss allowable if filing separately is sliced in half ($1,500) instead of the total $3K and it would be a waste if one spouse has no losses,” says Collado.
When And Why To File Separately
You want your finances to stay as separate as possible
This last point of not wanting to commingle funds can be a valid reason to file separately, Collado says; but note that if you reside in one of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin) then keeping finances separate isn’t really possible.
“Community property states’ general rule is that it doesn't matter who earns the income,”says Collado. “If you have a W-2 and your spouse is independent and you choose to file separately, you’re each deemed to have earned half of the other’s income regardless.”
Collado strongly advises couples in community property states to file jointly, adding that “it’s a nightmare to split everything,” but filing separately can be an option in these regions if you can prove you have finances that weren’t generated from work, such as an inheritance or trust fund.
One spouse’s medical expenses exceed 7.5 percent of their income
Another instance where you may want to file separately is when a spouse incurs high medical expenses in a tax year.
“Because 2018 required out-of-pocket medical expenses to exceed 7.5 percent of adjusted gross income (AGI) in 2018 to be deductible against your taxable income, and 10 percent beginning in 2019, it may make sense to file separately if one spouse could have a lower AGI and take better advantage of the available medical expense deduction,” says Adams.
“To illustrate, if both spouses made $100,000 ($200,000 combined) but one incurred $20,000 in medical expenses, none of that expense would be deductible because it did not exceed 10 percent of their joint taxable income; however, if they filed married but separate, that $20,000 threshold drops to $10,000 and $10,000 of the expense is now deductible against your taxable income,” says Adams. “The spouse with the substantial medical costs calculates their medical expense deduction against his or her own lower AGI when the couple files separate returns.”
You’re an international couple living separately
If your spouse lives in another country or you have a nonresident alien spouse, it can be advantageous to file separately. This is particularly the case if the non-U.S spouse is earning a lot in the other country.
Crystal Stranger, enrolled agent and author of “The Small Business Tax Guide,” explains by way of the following example:
“Say your spouse is a UK citizen who makes a lot of money — £200,000 a year. If you file jointly, you’ll likely owe a little bit [more], even with the foreign tax credit because of your joint income,” Stranger says. “You’d end up owing the U.S government even if your partner is living in a high tax country such as the UK.”
You suspect your spouse is doing shady business
One of the best (and certainly the least cheerful) reasons to file separately is if you suspect (or know) that your spouse is involved in or attempting something illegal.
“It sounds horrible but it comes up,” says Stranger. “If you suspect your spouse is doing shady dealings, file separate and take the extra cost of it.”
Even if you didn’t know your spouse was up to no good, the IRS can tie you to their misdeeds thanks to that joint return.
“In most cases, the IRS does not care that you say you didn't know [about fraud or another IRS offense],” says Collado. “When you file jointly, you're jointly liable if your spouse is doing something illegal like not reporting income.”
Ask a CPA to run an analysis for either filing type
Every situation is unique and there’s simply no one-size-fits-all answer to this tricky filing issue. While consulting a CPA is costlier that filing your taxes on your own online, it’s likely it can save you money and stress in the long run.
Ask your CPA to run an analysis to break down how both scenarios (filing jointly and separately) would work for you.
“A lot of people don’t know that they can ask their CPA to do this,” says Collado. “Even if you file jointly, you can ask them to run an analysis of what the breakdown would have been had you filed separately. That way, if one spouse feels like they may owe another from combining the income, they can keep track. Some clients care, and others don’t; it’s really up to you.”
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