Taxes & Insurance

What are the Tax Benefits of Marriage? Picking your first house, learning about each other, planning for your future – of the many joys of marriage, sitting down and figuring out how you’ll prepare taxes is not usually one of them. If you’re married, there are two options for your filing status with the IRS: married filing jointly, or married filing separately. The Advantages of Filing Tax Returns Jointly A joint return makes sense for most married couples, around 95% of couples decide to file jointly because it tends to result in a lower tax bill and easier filing. There are also a handful of benefits and deductions that couples may forfeit when filing separately: Earned income credit Child and dependent care credit Exclusion or credit for adoption expenses Education credits such as the Elderly and disabled credit and Lifetime Learning Credits Deductibility of contributions to a traditional Individual Retirement Account (IRA) Tax-free exclusion of U.S. Bond Interest and Social Security Benefits Roth IRA Contributions The deduction of net capital losses in excess of capital gains The student loan interest deduction Read More: Tax Benefits of Marriage What Does the Married Filing Separately Status Mean? When you file a tax return as Married Filing Separately with the IRS, this means that you and your spouse each report income and any deductions, credits, and exemptions on separate tax returns. The income tax brackets for married separate filers are half that of a married couple that files jointly, the 32% tax bracket kicks in at $163,301 (2020) for married filing separately vs. $326,601 (2020) for filing jointly. Additionally, both individuals will need to apply the same itemized or standard deduction option, even if this increases the tax burden of one spouse. See: 2020 Tax Brackets and Deductions When Does Married Filing Separately Make Sense? There are two main reasons people decide to file their taxes separately: to save money and to split up their financial lives. Married Filing Separately may make sense for you if one or more of the following applies to your personal situation. If you and/or your spouse have deductions based on Adjusted Gross Income: High medical expenses are the most common example of a deduction that is impacted by Adjusted Gross Income (AGI). You’re able to deduct medical expenses above 10% of your AGI. If you and/or your spouse have income-based student loans: Student loan payments are based on an individual spouse’s income rather than on joint income when you file separate returns. In some cases, this may reduce your obligation to pay higher payments for your student loans. However, there are also education tax credits you might lose, so make sure to weigh your options. You live in a community property state: Remember to look at your state and local taxes when considering to file jointly or separately. If you or your spouse live in what is known as a community property state, special rules apply for allocating income and assets. Even though you may file separate returns, each spouse may be obligated to report half of combined income and deductions on each return. To protect yourself against liability issues: Married filing separately may be an appropriate option if there is a lack of trust. To file a joint tax return, both partners must consent, so filing separately can help if one spouse suspects the other of tax evasion or misfiling tax documents. If you are not willing to file together: Married filing separate can also accommodate couples who are in the process of divorce or separation. Even if divorce or separation isn’t an issue, filing separately can allow each spouse to maintain autonomy over their own tax situation and potentially their own finances. Read More: How Marriage Can Impact Your Taxes Should I File Married Jointly or Married Separately? In general, filing separate returns might make sense when couples without dependents have large itemized deductions or are separating. The best way to figure out whether filing jointly or separately will decrease your tax liability is to prepare your tax return both ways and look at the net refund from each method. If you use a software bundle to prepare your tax return, many of today’s products will perform this calculation for you and provide a recommendation. Remember, these are just general guidelines to help you think about your tax filing status. You should consult a tax professional about your specific circumstances. Personal Capital’s team of dedicated financial advisors can help with tax optimization and strategy as it relates to your holistic financial plan. Schedule a free consultation with an advisor today for a free, no-obligation review of your portfolio and financial plan