Filing joint or separate income tax returns is a decision faced by married people annually. The differences in regulations and tax rates can increase or decrease your current tax bill. In most cases, if you and your partner "share" everything--from income to expenses to loans to health--your best option usually is to file jointly. However, there are circumstances that dictate that filing separately delivers greater benefits. Always consult with an experienced tax expert before making your final decision.
While you can find numerous experts who expound on the federal tax "marriage penalty," most married people benefit from filing joint tax returns. Internal Revenue Service regulations offer more benefit than detriment for married taxpayers. Filing jointly combines all income and expenses for both partners, with "married" tax rates and schedules. Valid deductions--such as mortgage interest, property taxes, charitable contributions and casualty losses--are merged. The IRS treats a joint tax return as one singular entity.
The tax rates for married persons filing separately are higher than those that apply to single people, who obviously also file separately. Therefore, in most situations, it behooves married persons to file jointly. However, there are times when married partners may benefit by filing separately, usually because one or the other had extraordinary expenses or losses that apply to them individually.
Rule of Thumb
Understand that, unfortunately, there is no easy rule-of-thumb decision-maker. Joint filing offers the benefit of combining and averaging your household income. For example, one partner earns $125,000 annually, while the other has yearly compensation of $37,000. Combining and averaging the two usually works to your benefit. Similarly, if your major deductions are joint obligations, you'll usually benefit by filing jointly. However, if one of you has extraordinary deductible expenses in a given year, you might enjoy lower tax obligations by filing separately. The only true rule of thumb is to consult with a competent tax adviser before making any final decisions.
Common Joint Filing Advantages
Filing joint tax returns is usually cheaper, easier and faster than filing separately. If you don't have large deductions, you'll enjoy a much larger standard deduction to reduce tax liability. Both partners, even if one doesn't work, are allowed to contribute to a tax deferred individual retirement account (IRA). Child care, educational, adoption expenses and dependent care costs can be deducted, but they are unavailable to separate married filers.
Advantages of Filing Separately
You are not liable for your spouse's tax liability or other taxable obligations when filing separately. Unreimbursed medical expenses and miscellaneous itemized deductions, restricted on joint returns, are available to lower your tax liability. Therefore, if one spouse, particularly the partner with much higher income than the other, has high casualty losses or other deductible items that don't apply to the other spouse, filing separately may reduce or eliminate the higher liability. This may result in a substantial tax savings for both partners when the net effect is calculated.