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For married taxpayers, the implications of filing a joint or separate return extend beyond tax rates and the standard deduction. Like many aspects of income taxation, there is usually more than one approach to finding the optimal solution. We have listed some of the more common implications of filing either a joint or separate return. Although not an exhaustive list, it highlights several issues to consider.
Some of the implications of filing a joint return include (among others):
- The requirement that individuals who file a joint return cannot be claimed as dependents on another return. This can be important when married students are still supported by their parents.
- An individual who files a joint return is not subject to the “kiddie tax” provisions.
- Joint filers are both responsible for the tax on their joint return. Thus, nontax factors should be considered (i.e., questionable business transactions). In addition, divorced taxpayers will each be liable for tax, interest, and penalties due on a joint return filed before the divorce.
- Finally, monthly Medicare premiums can increase substantially for a couple filing jointly versus filing separately, especially for a lower-income spouse.
The implications of filing a separate return include (among others):
- If one spouse itemizes deductions, the other must also, even if total deductions are less than the standard deduction.
- Taxpayers can generally only deduct expenses they actually paid versus those paid by either.
- Credits for child care, adoption, education, and earned income are generally not available.
- If separate filers lived with their spouse during any part of the year, a greater percentage of social security benefits may be taxable because the income threshold for determining the taxable amount is reduced to zero.
- The exclusion of gain on the sale of a principal residence is limited to $250,000 (each) for separate filers versus $500,000 for a joint return.
- The $25,000 passive loss exception for actively managed rental real estate may be totally or partially lost. Also, one spouse’s passive income cannot be offset by the other spouse’s passive losses.
- The limit on the capital loss deduction on a separate return is $1,500 (each).
- No exclusion is allowed for interest income from Series EE bonds used for higher education expenses.
- The deduction for interest on qualified education loans is not available.
- Taxpayers filing separate federal returns typically must also file separate returns for state income tax purposes.
There you have it: the implications for married taxpayers filing jointly or separately. Please contact us to discuss the most advantageous filing status or any other tax compliance or planning issue.