When Sharing Taxes Might Not Be a Good Idea






As a married couple, you probably share almost everything. But is that such a good idea when it comes to filing taxes?


Most couples file their return jointly, combining incomes and sharing deductions. That trend will probably continue, encouraged in large part by tax-law changes during the last few years to ease the marriage penalty. This filing phenomenon tended to show up when working spouses made roughly equal incomes; in many cases, they paid more taxes on their combined return than did unmarried couples filing separate returns as single taxpayers, forcing the married pair to face a tax penalty. Tweaks to the tax brackets have helped ease this problem.






But sometimes it pays for couples to re-examine how they file. There definitely are instances when filing separately might be warranted.


Togetherness or not?


Separate returns could produce tax savings if one spouse has a lot of medical expenses and a low income. By filing separately, the partner with the doctor bills might be more likely to meet the 7.5 percent threshold needed on 2012 returns to itemize medical costs. Medical deductions will be even more difficult to claim on 2013 and subsequent tax years because health care reform has increased the threshold to 10 percent.


If one spouse uses questionable tax-filing techniques, the other partner might be wise to insist on separate returns. When both partners sign a joint return, each is legally liable for the tax bill and any issues that might come up later. The Internal Revenue Service does offer innocent spouse protection, but the victimized partner must show he or she was indeed unaware of any tax scheme. Filing separately could afford more protection for you if the IRS comes around asking about a creative return.


And when a marriage is on the rocks, many couples decide to start splitting taxes even before the divorce decree is entered. This way they can avoid being tied together by tax issues after the marriage is over.


Not always a perfect union


But married filing separately could have some drawbacks.


Although the tax-rate disparities between single filers and married couples have been lessened in the two lowest tax brackets, spouses who file separately will find the tax rates for them aren’t as amenable in the upper ranges. In fact, a check of the tax brackets shows married-filing-separately taxpayers face the 28 percent, 33 percent and 35 percent brackets sooner than do other unmarried taxpayers.


For example, a single filer who earned $ 75,000 in 2012 would pay a maximum tax rate of 25 percent. But a married taxpayer who earned that same amount and filed a separate return would see a portion of his income fall into the 28 percent bracket. And while a single filer can make up to $ 178,650 and stay in the 28 percent range, a married taxpayer filing separately jumps to the 33 percent bracket when he makes more than $ 108,725.


Deduction flexibility also is sacrificed. If one spouse itemizes, both must itemize, splitting the items to be listed on a separate Schedule A for each. That means a partner with few deductions couldn’t use the standard amount and might get cheated when it comes to reducing taxable income.


Deduction, credit considerations


Many tax-cutting credits and deductions are forfeited. You can’t take the earned-income credit, claim adoption expenses or child and dependent-care costs, use educational tax credits or even deduct the interest you paid on a student loan if you’re married and filing separately. If you have children, you might find the child-tax credit reduced because it phases out at different income limits for the various filing statuses. And the amount of capital gains losses you can deduct is cut in half.


The married filing separately rules are complicated further if you live in a community property state — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin. In these places, state law determines whether your income can be considered as separate or community for tax purposes. See IRS Publication 555, Community Property, for more information.


You should go ahead and figure your taxes as both joint and separate filers and use the method that produces the lower tax bill. But chances are, you’ll find joint filing will be your best choice.


And after all, aren’t taxes a tiny price to pay for love?


More From Bankrate.com


Yahoo! Finance – Personal Finance | Taxes





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