Tax season is upon us and, if you got married in 2012, you have an important decision to make: to file jointly with your new spouse, or separately. The IRS allows for couples to file either way in the year that they are married. In general, filing jointly tends to be more beneficial, but there are some cases when it makes more sense to file individually.
Here’s what you need to know:
Tax Code Changes
Until recent years, when working couples made comparable incomes, they would end up paying more in taxes when filing jointly than if they had been unmarried and filed separately. New tax laws, however, have tweaked the tax brackets in such a way that the “marriage penalty” is no longer such an issue. As a result, most couples now file their taxes jointly, with a combined income and shared deductions.
Credits and Deductions
One of the biggest reasons to file jointly is that, if you file separately as a married couple, you forfeit many credits and deductions that you would otherwise be entitled to take. For example, you wouldn’t be eligible for credits for earned-income, lifetime learning, adoption, or child and dependent-care costs. You would also forfeit deductions like student loan interest, Social Security exclusions, and U.S. Bond interest. The child tax credit could be lower if you file separately, as well.
In addition, when married couples file separately and one itemizes deductions, the other must also itemize, splitting them equally on separate Schedule A forms. If one spouse didn’t have many deductions, he or she may not be able to reduce the taxable income by taking the standard deduction amount.
Tax liability is shared when a married couple files jointly, which means that if one spouse has a tax debt, the other spouse’s refund can be withheld to pay it. Even more alarming, the innocent spouse can be hit with the same penalties, fines, and/or jail time for his or her spouse’s tax misdeeds. The IRS does offer protection for innocent spouses, but you must be able to prove you were completely unaware of any violation on the part of your spouse.
If one spouse has a low income and a lot of medical bills, filing separately may be financially smart. In order to itemize medical costs for 2012, a threshold of 7.5 percent is needed, which may be hard to meet if the spouse has a higher income. For 2013 and beyond, the threshold goes up to 10 percent, so filing separately after that point will be even more important for couples where one has high medical expenses.
Before deciding whether to file together or separately, you’ll want to consider your incomes and which tax brackets you fall into. Disparities in tax rates between married and single filers have decreased in the lowest tax brackets, but higher income ranges are a different story. Married taxpayers who file separately reach the 28 percent, 33 percent, and 35 percent brackets at a lower income than unmarried taxpayers.
If you’re still a little bit lost about whether you should file separately or together, here is a quick summary:
- Consider filing separately if your spouse has tax debt, if one of you has low income and high medical bills, and/or if you think you might be splitting up soon.
- Consider filing jointly if you are able to take several deductions or credits, if you are in a higher tax bracket, and/or if you are itemizing.