Tuesday, December 27, 2011

Should I file jointly or separately?

Often married couples aren't sure if they should file their taxes jointly or separately.  

Rule #1 - If you are estranged from your spouse or don't trust your spouse, you do not want to sign a return with their possibly bogus information.  Once you file a joint return, you are liable for any errors and the balance due.

Rule #2 - If rule #1 does not apply, you want to save as much tax as you can. The only way to truly know is to run the numbers.  Figure the taxes both ways. It is important to compare the results for both the Federal as well as the Ohio returns.  This is the part of preparing taxes that I just love.  It's such a puzzle and it's tax savings when it works out right.

Before doing all this work, it may help to know some general guidelines.  In Ohio, if both spouses have similar incomes, they will save taxes on the Ohio return by filing separately. So, if only one spouse has income, you'll always want to file a joint return (unless rule #1 applies).

But what about the Federal?  On the Federal return, most couples' taxes will be the same whether they file jointly or separately (exceptions noted below). However, there are certain deductions and credits that are disallowed if you file separately.  What?  Yes, you must file a joint return to claim some very popular credits such as; Earned Income Credit, Dependent Care Credit, and all the Education Credits and deductions.  Also, in most cases you cannot contribute to either a traditional or a Roth IRA if you file separately.  Finally, Social Security income will be taxable at the maximum rate if you file separately.   But there are many couples that do not qualify for any of these credits.  They can save hundreds of dollars by filing separately.

There are some situations where you can save on your Federal taxes by filing separately. The most obvious cases are those returns with large amount of Miscellaneous or Medical deductions.  These deductions are subject to a floor, based on a percentage of income, and only the deductions over the floor lower your taxable income. By filing separately, your floor is much lower and more of your deductions will help you. Another area for potential savings are for couples with children, where they phase out of the child tax credit when the file jointly. By filing separately and shifting children and other deductions, the spouses' incomes are such that one spouse can claim the full child tax credit.  They'll save on Ohio tax, and hopefully will have limited adverse effects from the tax tables and AMT.  These returns can be very tricky to maximize savings, but done correctly, they can yield thousands in tax savings.

To sum up, if there are no deductions or credits that will be lost on the Federal return by filing separately, and income is similar for both spouses, you probably want to file separately.  If you have Education Credits or want to contribute to an IRA, you will probably want to file jointly.

Can't I file jointly on the Federal, but separately on the Ohio return?  No.  Ohio law requires your filing status to be the same as your Federal return.

1 comment:

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