Filing your taxes together may not be the glue that will ensure you stay married forever. But it could save you money and help you cash in on some lucrative tax credits.
By Scott Van Voorhis
Feb 19, 2018 11:40
It would certainly be nice to think that couples who file their taxes together are more likely to stay together.
But at the very least, filing jointly can save you money. And given that financial issues are a classic flashpoint for couples, that can’t be a bad thing.
Sure, there is no one-size-fits-all approach when it comes to doing your taxes. In some cases, you may be better off filing separately, especially if you suspect your partner isn’t telling you the whole truth about their financial past, financial planners say.
However, couples who file together enjoy a number of advantages, from generally lower tax brackets to more generous tax credits. And those advantages won’t disappear with the new tax law just passed by Congress.
“If you file married filing separately, the income limits are really low” for the various tax brackets, notes Edward Vargo, a certified financial planner whose Burning River Advisory Group is based in Westlake, Ohio. “You get hammered pretty quickly.”
To capture the lowest rates, filing jointly works best when one spouse is making significantly more than the other.
For example, take a teacher making $50,000 and a spouse earning $15,000 working part-time. In a straightforward tax calculation, each would pay higher rates on their incomes if they filed separately.
The better paid spouse would pay 25% while her partner would pay 15%. Filling jointly, their combined income of $65,000 would stay in the 15% bracket, while the first $18,650 would be taxed at 10%. If they each filed separately, they both would hit the 15% bracket at $9,326.
“It only makes sense when on a combined basis you are paying less in total income taxes,” said Lili Vasileff, president of Wealth Protection Management in Greenwich, Conn., and author of “Money and Divorce: The Essential Roadmap to Mastering Financial Decisions.”
If you have children, the child care tax credit is also higher if you file your taxes together.While the threshold for the child tax credit maxes out at $55,000 for couples filing separate returns, the threshold jumps to $110,000 for joint filers, according to IRS rules. You can claim a $1,000 credit per child on your 2017 return, with that doubling to $2,000 on 2018 returns due to the new tax law.
Of that $2,000, up to $1,400 is refundable if you don’t owe any back taxes, with a $500 credit for other dependents, according to the provisions of new tax law.
You also have to file jointly if you are married to qualify for the earned income tax credit, designed to help lower-income working families, Vasileff notes. The cutoff for a couple with three children is just under $54,000.
The same goes for the child and dependent care credit, which you can’t get if you file separately, according to IRS rules. That credit ranges from 20% to 35% of your childcare expenses, up to $3,000 for one child and $6,000 for two or more, IRS rules state.
You also have to file jointly in most cases to qualify for a Roth IRA, Vargo notes.
Still, the new tax plan — the rules of which will kick fully into gear when you are preparing your 2018 returns come early next year — has thrown a curveball of sorts into the filing separately vs. filing jointly debate.
The new tax plan caps the deduction for state and local taxes at $10,000, an amount that is relatively low for many people who own homes in high-cost metro markets on the East and West coasts.
But in a wrinkle, couples who file separately can each claim up to $10,000 — for a total of $20,000. Couples filing jointly, by contrast, are capped at $10,000.
That means you can’t just assume off the bat that filing jointly will be better without first crunching the numbers, Vasileff notes.
“I think now with the various caps and the elimination of certain itemized deductions, everyone is going to have to be running a calculator here,” she says.
Still, filing jointly may not be for everyone. If your spouse is determined to game the IRS or has had financial or tax problems in the past, you could be opening yourself up to liability once you sign that joint return, Vasileff says.
Maybe your better half is overstating deductions or not declaring income, she points out.
“There are many ways people can be tax strategists without the proper respect for the IRS and it can come back to bite you,” Vasileff notes.
That said, filing separately isn’t fool proof either, says Sallie Mullins Thompson, a New York-based financial planner and certified public accountant. Thompson worked with a couple who filed separately where the husband was pulling down a hefty salary as a law firm partner while the wife, who owned her own business, was earning less.
Both were shocked when the IRS started sending notices to the wife, saying she owned $50,000 in back taxes. It turned out the IRS did not realize the two were a couple and wondered how the wife was living a lifestyle that appeared to be beyond her means.
“The returns never got put together,” Thompson said, noting that she was not handling the couple’s returns at the time. “The IRS was sending them computer notice after computer notice. It took three years to resolve.”