As the year draws to a close and you (hopefully) start organizing your taxes, one of the determinations that you will have to make is what your tax filing status will be when you file your taxes. Different rules about tax brackets apply, depending on your filing status. For married couples, the decision becomes whether to file jointly or separately.
Married Filing Jointly
When you file a joint tax return, you combine your income, along with your deductions. In many cases, this makes sense, particularly if one spouse makes quite a bit less than the other. This can keep your joint income in a lower tax bracket since the tax brackets for filing jointly are twice as wide as those for separate brackets. The marriage penalty though does come back in 2013 if Congress does nothing before the end of the year.
Consider this example for 2012: Your taxable income is $75,000 a year, and your spouse makes $40,000 a year. For tax year 2012, if you filed separately, you would pay a 28% marginal rate, while your spouse would be in the 25% bracket. If you combine your income ($115,000), you would be in the 25% tax bracket. More of your own income would be figured at the lower tax rate.
On top of that, you can combine your tax deductions, so you can get more when you itemize in some cases. In a number of ways, married filing jointly can benefit your financial situation. But this isn’t always the case. Sometimes it makes sense to file separately.
Married Filing Separately
Before you just assume that you should file separately, it makes sense to take a look at the possibility of filing separately. In some situations, it makes sense to file separately.
Here are some situations that might warrant a married filing separately status:
- AGI-based deductions: Some tax deductions, such as medical expenses and unreimbursed business employee expenses are based on a percentage of AGI. For example, you can only deduct non-reimbursed medical expenses for amounts above 7.5% of your AGI in 2012 (this threshold will rise soon). If your lower-earning spouse has a lot of medical expenses, it might make sense to file separately, since that would trigger the deduction. Filing jointly might mean your AGI is too high to take advantage of these types of deductions.
- Questionable tax-filing: When you file jointly, you accept responsibility for your spouse’s taxes as well as your own. If you worry that your spouse uses questionable methods for determining tax liability, it might make sense to distance yourself by filing separately. That way, your spouse is responsible for his or her own tax problems.
Realize, though, that married filing separately comes with restrictions. You can’t make certain deductions (interest paid on student loans) or qualify for certain tax credits (dependent-care costs) when you file separately, or you could see a lower child-tax credit.
Another issue is that how income is determined for tax purposes depends on the state. In community property states, you might find that filing separately comes with its own snarl, depending on the income source and other factors.
It can make sense to figure your taxes both ways, though. Check different scenarios to see whether or not you can save on your tax bill by filing separately. It only takes a little extra time, and it could result in tax savings overall.