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Married Filing Joint or Married Filing Separately - Which is the Best Choice?

Author: Jenny Shilling

The federal tax code, as you may know, gives benefits to those who file as "Married Filing Joint."  With the recent changes regarding same-sex marriages, it seems important that we discuss your filing status and how it can affect your taxes.

Under federal law, if you are legally married you have the choice of filling in one of two ways:  Married Filing Joint or Married Filing Separately.  For Federal tax purposes, you are considered married if on the last day of the year you are married and living together. This filing status includes common law marriages that are recognized in the state where you now live or in the state where the common law marriage began. Even if you are living apart, on the last day of the year you are considered married if there is no legal decree of divorce or separate maintenance. If you are divorced under a final decree by the last day of the year, you are considered unmarried for the whole year.

If you should choose to file as Married Filing Separately (MFS) there are a few  limitations that you may wish to consider:

Married Filing Separately (MFS) taxpayers may not be eligible to claim the following tax benefits:

• Deductions of tuition and fees
• Deduction of student loan interest
• Tax-free exclusions of US bond interest
• Tax-free exclusions of Social Security Benefits
• Credit for the Elderly and Disabled
• Child and Dependent Care Credit
• Earned Income Credit
• Education Credits

Other penalties/restrictions:

• When filing separately taxpayers have a much lower income phase-out range for IRA deductions.
• Both spouses must claim the standard deduction, or both must itemize their deductions. You cannot claim the standard deduction if the your spouse is itemizing.
• This filing status generally pays more in tax of all the filing statuses.

Filing status determines which standard deduction amount and which tax rates are used when calculating a person's federal income tax for the year. For 2014, a person who files as married filing separately can claim a standard deduction amount of $6,200.

Living in a community property state has its effects upon your taxes as well.  Community property states include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. If you file separate returns in a community property state, you and your spouse must each report half of your combined community income and deductions in addition to your separate income and deductions. Each of you are required to complete and attach Form 8958 to your Form 1040 showing how you figured the amount you are reporting on your return. Be sure to list only your share of the income and deductions on the appropriate lines of your separate tax returns (wages, interest, dividends, etc.).

Should you have questions regarding your taxes or your filing status, The Tax Office, Inc. will gladly give assistance.  Our tax specialists are available by phone or email. Contact us today for a no cost, no obligation discussion of your tax status.

Just Say "I Do"

Author: Keith Huggett 

With the legal definition of marriage changing, there will be changes in the tax laws regarding marriage as well. As it stands currently, there are both benefits and setbacks to being married in the tax code, depending on how much you earn and how you file.

Married, filing jointly allows married couples to use the most-favored tax-rate table to prepare their taxes.  However, you also have the option to file separately.  The only way to find out which way saves you more money is to run the numbers through your tax return.

At this point, how much you and your spouse earn determines how much you can save.  If you earn more than your spouse, you can save more.  If you and your spouse both earn high wages, you can expect to pay more in income taxes.  Over the years, our lawmakers have tried to balance out the penalty of being married and earning high wages.

As a married couple, you also have an IRA advantage. If your spouse is "jobless" and has no compensation - wages, salaries, fees, commissions, tips, bonuses, or self-employment income, you can contribute to an IRA on his/her behalf. Also, the income limits that apply to your IRA contribution when you are in a qualified retirement plan increase if you are married.

If you are planning on selling your home, as a single tax payer, you qualify to exclude up to $250,000 of the sale profits. If married, that amount doubles to $500,000.  However, you and your spouse must both pass the required "use" test and one of you must pass the "ownership" test.

Death comes to us all, and the IRS wants their part of it.  Should you accumulate enough cash, investments, and property during your lifetime, it will fall to your heirs to pay the estate taxes. Federal estate and gift tax rules benefit married couples.  For the 2013 tax year, an individual's estate qualifies for an exclusion of up to $5.25 million from estate taxes.  If you are married, you and your spouse get to exclude double that amount for up to $10.5 million from estate taxes.

Citizenship has it's benefits too, as we all know. If you are married, the unlimited marital deduction allows you to pass assets to your spouse with no federal estate or gift taxes as long as he/she is a United States citizen.  

As you can see, marriage can affect your taxes in both a positive and negative way depending on your earnings throughout your life, even unto your death.  Proactive tax planning along the way can help you get the most out of your earnings and required tax payments.  The Tax Office, Inc. and their tax specialists can assist you with tax planning, estate planning and any additional questions you may have.  Please contact us today.

The Supreme Court Brings Tax Equality to Same Sex Families

Author: Keith Huggett 

With a vote of of 5-4 the Supreme Court leveled the tax field for same sex couples. No longer are same sex married couples forced to file separate tax returns. They now have the option to file jointly as a married couple just as heterosexual married couples do. They can file taxes, claim inheritances, and handle other tax and benefit issues in the same way as other married couples. Insurance benefits will no longer be considered taxable income.

Due to being unable to file jointly as a married couple there are a couple of tax issues that same sex couples will have to deal with.  Filing separately will have caused an overpayment in taxes, for which, they will now be able to file an amended joint return in an attempt to get a refund for the last three years. For years beyond that, legal aid will be necessary.

In order to file any tax return at all as a "legally married couple" will depend on where a couple lives. The Internal Revenue Service and the Social Security Administration  both define a marriage as "legal" depending on where you live. If the state you live in does not recognize your marriage as being legal, you cannot benefit from federal spousal benefits. In order for a same sex couple to benefit from the federal spousal benefits they must live in 1 of the 13 states that recognize same sex marriage.  These states are:

• California
• Connecticut
• Delaware
• District of Columbia
• Iowa
• Massachusetts
• Maine
• Maryland
• New Hampshire
• New York
• Rhode Island
• Vermont
• Washington

Because of the changes to DOMA, it's effects are going to ripple through the tax code and cause many changes to the lives and family members of same sex couples.  People have been working hard to effect this change for so long, now that it is here, there are still many difficult challenges and complications to work out.

With California coming on board as the 13th state to legalize same sex marriage, couples living here are going to be facing many tax ramifications.  At the Tax Office, Inc. Our tax specializations suggest that speaking with a tax professional might be in your best insterest before making any changes to your tax plan.  If you have any questions regarding how the defeat of DOMA and the legalization of same sex marriage may or may not affect your tax situation, please feel free to contact us for no cost, no obligation conversation. Our tax professionals are here to answer any questions you may have.