You know that you must choose a filing status when you file your tax return, but do you know what your choice really means?
Picking the right filing status matters because the status you select will influence your tax rates, eligibility for certain tax breaks, standard deduction, and correct tax calculation.
And there are plenty of filing statuses to choose from:
- Single
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying surviving spouse
Married individuals may wonder whether filing a joint or separate tax return will yield the lowest tax. That depends.
If you and your spouse file a joint return, you are “jointly and severally” liable for the tax on your combined income. That means you’re both on the line for getting it right and settling up. You’ll also both be liable for any additional tax the IRS assesses, including interest and penalties.
In other words, the IRS can pursue either you or your spouse to collect the full amount you owe.
“Innocent spouse” provisions may offer some relief, but they have limitations. For this reason, some people may still choose to file separately even if a joint return results in less tax overall. For example, a separated couple may not want to be legally responsible for each other’s tax obligations. Still, filing jointly usually offers the most tax savings, especially when the spouses have different income levels.
While combining two incomes may put you in a higher tax bracket, it’s important to recognize that filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use “married filing separately” rates. These rates are less favorable than the single rates.
Still, there are situations where it’s possible to save tax by filing separately. For example, medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in a larger total deduction.
Tax breaks only available on a joint return
Some tax breaks are only available to married couples on a joint return, including:
- Child and dependent care credit
- Adoption expense credit
- American Opportunity tax credit
- Lifetime Learning credit
If you or your spouse were covered by an employer retirement plan, you may not be able to deduct IRA contributions if you file separate returns. Nor will you be able to exclude adoption assistance payments or interest income from Series EE or Series I savings bonds used for higher education expenses.
Unless you and your spouse lived apart for the entire year, you won’t be able to take the tax credit designated for the elderly or the disabled, either.
Social Security benefits
When married couples file separately, Social Security benefits may be taxed more.
Benefits are tax-free if your “provisional income” (AGI with certain modifications, plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return but zero on separate returns (or $25,000 if the spouses didn’t live together for the whole year).
Questions? Contact your accountant
Choosing a filing status impacts your state or local income tax bill, in addition to your federal tax bill. It’s important to evaluate the total taxes you might owe before making a final decision.
Considering these factors and deciding whether to file jointly or separately may not be as straightforward as you’d think. That’s where we come in. Contact your Smolin accountant for a fuller picture of the potential tax impacts of each option.