Married couples can choose how they want to file taxes - jointly or separately. Generally, married couples file a joint tax return to get larger tax deductions and credits. However, they can also file taxes separately.
Whether you and your spouse should file taxes jointly or separately is a complex decision. That’s why here’s a list of things you must check out while deciding whether or not to file a tax return as married filing jointly or married filing separately.
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You are eligible to file a joint tax return if you face this type of situations:
You are married on the last day of the tax year that is, 31st December.
Your spouse dies during the year. You can still file taxes using the married filing jointly status even if your spouse died on 1st January.
The primary reason for filing a joint tax return is to lower the tax bill. Some other reasons include:
Tax credits and deductions for family
You can get family-related tax deductions and credits only if you are married. If you file a separate tax return, you may not claim these benefits:
- American Opportunity and Lifetime Learning Education Tax Credits
- Earned Income Tax Credit
- Child and Dependent Care Credit
- Adoption Credit
Benefits for retirement contributions
You will get more benefits on your IRA retirement contributions if you file a tax return together with your husband/wife. The IRS decides the maximum IRA contribution limits based on your Adjusted Gross Income (AGI). From this perspective, married couples will fetch more benefits if they file a tax return jointly.
If you file a joint tax return, you may face these disadvantages:
Experience problems for your spouse’s misdeeds
You will be legally responsible if your spouse is a tax cheat. In this case, it’s better for you to file a separate tax return. Filing taxes jointly will make you responsible for your spouse’s tax, penalties, and interests.
Not able to take advantage of medical cost deductions
If a married couple files a tax return jointly, becoming eligible for deductions of medical expenses gets difficult. However, it’s easier to be eligible for medical costs deductions if you file taxes separately.
File your taxes separately if your situation matches one or more of the following criteria:
Both of you owe unpaid taxes or child support. The IRS may take your tax refund to settle your dues if you file a joint tax return.
You and your spouse draw high income.
You live outside a community property state. If you live in such a state, the property owned by a couple is considered a belonging to both the partners equally.
Your spouse is not sure about the tax situation (this may occur when you’re going through a divorce procedure).
Both husband and wife have lots of medical expenses (especially, if one spouse’s Adjusted Gross Income is lower than the other).
Both of you have enrolled in an Income-Based Student Loan Repayment Plan (a couple’s combined income is considered rather than a spouse’s income while making the payments).
You will only be liable for your own taxes if you file a tax return as married filing separately. Apart from this benefit, you can enjoy other benefits like:
Lower tax bill
If a couple’s combined AGI is more (that is, $313,800 in 2017), they can lose possible deductions and credits if they file jointly. In this scenario, married couples can lower their tax liability by filing taxes separately.
Avoid monetary hassles during divorce
Filing a separate tax return will prove beneficial to you and your spouse during divorce if both of you want to keep your finances separate. Hence, you’ll not be responsible for your spouse’s tax liabilities.
No tax for unearned income
Unearned income means income from investments, dividends, capital gains or rental income. You have to pay 3.8% tax on unearned income if you make $250,000 jointly or $125,000 separately.
Some of the limitations of filing taxes separately include:
The standard deduction amount will be reduced as compared to what it would have been if you have filed your taxes jointly.
You would get half of your Alternative Minimum Tax exemption amount if you file a separate return.
You’ll get half the amount of your capital loss deduction.
The Saver’s Credit will also be lowered upon filing taxes separately.
You can’t claim the Credit for the Elderly or the Disabled if you ever lived with your spouse during the tax year.
You cannot claim a standard deduction if your spouse itemizes deductions. You must also itemize as “the standard deduction amount is zero for the non-itemizing spouse.”
How a married couple should file taxes depend totally on their current financial condition. So, make sure to assess the pros and cons of both married filing jointly and married filing separately before signing the papers. If you still haven’t filed your taxes, do it by 18th April 2017 to avoid paying penalty and interest.