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Should You Always File Jointly?

In most cases, filing jointly yields more tax benefits than filing separately. Having said that, there are still instances in which you may not want to file jointly and rather elect to file separately. Are you filing to maximize your tax savings and to ensure that you are maintaining compliance with tax reporting requirements?

filing-jointly-or-separatelyShould you file jointly or separately?
When you begin to file your individual tax Form 1040, you’ll notice that you have several options to select from in electing a filing status. In many instances, if you’re married, you’ll want to elect the status to file jointly via line 2 of your Form 1040. In fact, the majority of the population that is eligible (i.e. 96%) elects to file jointly as opposed to separately. However, there are still some reasons to consider filing separately.

One spouse has significantly less income and large itemized deductions
You’ll need to run the numbers, but there may be reason to file separately if one spouse has significantly less income than the other and large expenses eligible to be claimed as itemized tax deductions. Let’s suppose one spouse has large medical expenses of $25,000 and income of $35,000 for the year and the other spouse has adjusted gross income (AGI) of $250,000. If the couple files jointly, then none of the medical expenses may be claimed as an itemized deduction. This is due to the fact that only medical expenses paid out of pocket that exceed 10% of your adjusted gross income may be claimed as an itemized deduction. The couple’s total AGI is $285,000, which translates to $28,500 when factoring in the 10% floor. However, if they file separately, then the spouse with an AGI of $35,000 may deduct $21,500 in taxable income ($25,000 less $3,500). Medical expenses are just one example of itemized deductions that need to be considered. Others to factor in include casualty losses or un-reimbursed employee business expenses.

One spouse has large capital gains and dividends
Filers with taxable income over $400,000 ($450,000 for joint filers) will face a 39.6% tax rate for the 2013 tax year. If you happen to be in this ordinary income tax bracket, dividends and long-term capital gains are subject to a 20% tax rate as opposed to 15% for lower income filers. In addition, if you earn $250,000 ($300,000 for joint filers) there will be a 3% reduction to the itemized deductions you normally claim and phase-outs for personal exemptions. Thus, it may be worthwhile to file separately to keep your taxable income below these amounts. Again, you’ll need to run the numbers to confirm, but it may warrant that you investigate the scenarios.

On a similar note, taxpayers may also face the 3.8% investment flat tax if their adjusted gross income exceeds $200,000 ($250,000 for joint filers). For instance, an investor with $200,000 in wages and $25,000 in investment income either through capital gains (including home sales in excess of the capital gains exclusion), interest, rent, royalties or dividends, will be subject to a 3.8% tax on the $25,000, if they are a single filer.

One spouse has tax liens or you’re going through a divorce
Other scenarios in which filing separately can be a benefit are if one spouse has tax liens against them, owes unpaid child support, or is being audited by the IRS. You’ll want to make sure that you aren’t liable for your spouse’s tax debts and may lose any tax refund that you are due. If you’re going through a divorce, we advise that you keep your finances and tax filings separate as well.

More tax questions? Browse answers or ask tax filing questions online. You can also find accountants online here.

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