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January
1999
Filing
Jointly or Separately --- Which Is Best for You?
As a married
taxpayer, should you file a joint tax return or separate returns?
Your answer will depend upon which filing status results in the
lowest tax. In most cases, filing jointly offers the most tax savings,
particularly where the spouses have different income levels. The
"averaging" effect of combining the two incomes can bring
some of it out of a higher tax bracket. Filing separately means
each spouse must use the "married filing separately" rates.
These rates are based on brackets that are exactly half of the "married
filing jointly" brackets but are still less favorable than
the "single" rates. The "marriage penalty" (which
requires some marrieds to pay at a higher tax rate on the same total
income than they would pay if each were single) can't be eliminated
by filing separate returns.
Expenses, deductions,
and AGI
Filing separately might be beneficial where one spouse has significant
amounts of medical expenses, casualty losses, or miscellaneous itemized
deductions, deductions reduced by a percentage of adjusted gross
income (AGI). If these deductions are isolated on the separate return
of a spouse, that spouse's lower separate AGI, as compared to the
higher joint AGI, can result in larger total deductions.
On the other
hand, the amounts you claim as a deduction for exemptions and for
itemized deductions, including miscellaneous itemized deductions,
are phased out (i.e., reduced) once your AGI goes above a certain
threshold, depending upon your filing status. The threshold is higher
for joint returns than for separate returns. This means that a phase-out
which might occur on a separate return may be avoided if you and
your spouse file a joint return. The tax savings at stake will vary
depending on how many exemptions are claimed and your income levels.
Similar phase-out rules apply for certain itemized deductions.
Credits available
only on a joint return
Other tax factors, such as the child and dependent care credit,
Hope and Lifetime Learning credits, and the taxability of social
security benefits, may point to the advisability of filing a joint
return. These credits are available to a married couple only on
a joint return. Nor can you deduct qualified education loan interest
unless a joint return is filed.
The decision
you make for federal income tax purposes may have an impact on your
state income tax, so the total tax impact has to be compared. For
example, an overall federal tax savings by filing separately might
be offset by an overall state tax increase, or a state tax savings
might offset a federal tax increase.
Joint taxpayers:
beware…
Beware, on a joint return you are both jointly and severally liable
for the tax on your combined income, including any additional tax,
interest, and penalties that IRS assesses. The IRS can come after
either of you to collect the full amount. Although there are provisions
in the law that offer relief from joint and several liability, these
provisions have their limitations. Therefore, even if a joint return
results in less tax, you may choose to file a separate return if
you want to be certain of being responsible only for your own tax.
Unfortunately,
there are no hard and fast rules of thumb covering when it pays
to file separately. Due to the complex tax laws, there are often
a number of different factors that affect any given situation. The
only guaranteed way to come up with the correct decision is to calculate
your tax bill both ways: jointly and separately. Then the approach
that leads to overall tax savings could be used.
Veres &
Company can run the numbers for you to make sure you pay the minimum
amount of taxes allowed.
Please
call us if you would like to discuss the details of your particular
circumstances.
Veres
& Company
Certified Public Accountants
Freedom Square Office Park
4401 Rockside Road, Suite 406
Independence, Ohio 44131
(216) 524-8422
Fax (216) 524-2624
e-mail: staff@veres.com
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