Should Spouses File Joint or Separate Tax Returns?

You said "I do" when you married your spouse, and you joined your lives together. But should you join in his or her tax return? Perhaps. Usually, married taxpayers are advised to file joint tax returns because of inherent advantages in the tax law. But sometimes, married couples reap more benefits when they file separately.
Make sure you and your spouse consider the pros and cons of both joint and separate returns. You don’t want to miss any tax savings.

Realize You Have a Choice
Each year, you and your spouse can choose to file jointly or separately. But separate returns are required if you:

• Divorce before the year end,
• Have a different tax year than your spouse, or
• Are a nonresident alien (or your spouse is), although then you may both elect to file jointly.

If you and your spouse file separately and wish to amend your returns, you may do so within three years of the separate return’s original due date, excluding extensions. But you can’t amend a joint return by filing separate returns after the joint return’s due date.

Understand Implications of Filing Together
You’ll want to consider several factors when deciding how to file returns. Some differences include tax rates, standard deductions and itemized deductions. For example, married taxpayers filing joint returns can take advantage of lower tax rates and a lessened impact on itemized deductions.

Keep in mind that if you file a joint return, no one else can claim you as a dependent on their tax returns. With a minor exception, this may affect married students being supported by their parents.

Additionally, if you are in the process of divorcing and file a joint return, be careful. If you are not divorced before year-end, you and your spouse will both be liable for tax, interest and penalties due on your joint return.

Understand Implications of Filing Separately
If you file separate returns and one spouse itemizes, both spouses must itemize, even if one spouse’s deductions total less than the standard deduction. You also will lose some tax credits, such as the Child and Dependent Care credit, the Hope credit and Lifetime Learning credit, and the deduction for interest on qualified education loans.

The modified adjusted gross income (AGI) threshold amount for taxing Social Security benefits is zero when filing separately. You also may owe tax on Social Security benefits that are typically not taxable on a joint return.

Filing separately also restricts your ability to make deductible, traditional IRA or nondeductible Roth IRA contributions. For deducting IRA contributions, the modified AGI phaseout for active plan participants begins at zero and the reduction is fully phased out at $10,000 for spouses filing separately. Filing separately also prevents you from using your spouse’s compensation to make an IRA con-tribution. Additionally, separate returns prevent both spouses from converting a traditional IRA to a Roth.

If filing separately, you may be hit by the alternative minimum tax (AMT) because the AMT exemption starts to phase out at $75,000 of AMT income for married couples filing separately ($150,000 for married cou-ples filing jointly). If AMT income exceeds $175,000, you’ll lose the $24,500 AMT exemption much quicker. You also must add back 26% of the amount your AMT income exceeds $175,000, up to a maximum of $24,500. This phantom income increases your AMT liability.

Consider Filing Separately
Married taxpayers have a yearly option to file joint or separate tax returns, with some restrictions. You should consider filing separately if you or your spouse have:

• Miscellaneous itemized deductions exceeding 2% of your AGI, or
• Medical expenses subject to the 7.5% AGI limit.

In some situations, the tax savings can be sig-nificant when filing separately because the AGI for each spouse decreases, reducing your respective AGI floor. So if you report a significantly large sum for either of the above deductions, you can take advantage of a lower AGI to deduct more on your return — resulting in a tax savings for you and your spouse.

Community property income and deductions are usually split equally between spouses — regardless of who generated it. Filing separately may not be advantageous because community income includes wages and income from community property. Thus it will be split equally on separate returns.

Innocent Spouses can seek Protection
After you consider the economic implications of filing joint or separate returns, don’t forget about liability issues. The costs of filing separately for married couples may be worth the liability protection that separate returns offer.

Are you concerned about your liability if you file a joint return and your spouse is negligent about paying taxes or not reporting income? The IRS may grant equitable relief for spouses who have no knowledge of their spouses’ tax liability or delinquency. So if your spouse disappears or refuses to pay, you may have protection against liability for back tax or penalties — with some eligibility restrictions. To qualify, elect an innocent-spouse defense or request equitable relief on IRS Form 8857 no later than two years after the agency begins collection procedures.

A third option: Make a separate liability election so your tax liability won’t exceed your portion of the joint tax. To qualify for this election, you must — among other things — be divorced or legally separated, or have lived apart from your spouse for the 12 months ending on the date you file for relief.

Know Your Options
Many factors — such as the nature of your income (whether community or separate) — affect the decision to file jointly or sepa-rately. Keep in mind that your choices may be limited. As always, diligently keep detailed records — whether filing jointly or separately. You and your spouse may need to show income and deductions were allocated.
Before you and your spouse file your returns, give us a call. We can help determine the best strategy for you both.