Monday, February 27, 2017

6 signs married couples should consider separate tax returns

Whenever I want to escape the crazy that is real life, I turn to the movies. Sometimes it's my favorite tax-themed films.

Sherlock-PBS-Amanda_Abbington-Benedict-Cumberbatch_Martin-Freeman
Amanda Abbington and Martin Freeman, pictured here on the set of "Sherlock" with Benedict Cumberbatch, who plays the show's title character behind them, have separated. (Photo courtesy PBS Masterpiece)

Other times when I can't get away for a couple of hours, I surf entertainment news. Go ahead, judge me. Then admit you've done the same!

In perusing the web recently, I stumbled across a list of celebrity couples who have split.

In addition to the usual Brangelina and Johnny Depp/Amber Heard breakup deets, I made a terrible discovery.

Dr. John Watson and his wife Mary Morstan are splitsville.

Unsolvable marital mystery: OK, you caught me. In the "Sherlock" series that airs on PBS in the United States, Mary — spoiler alert — is dead.

But actor Martin Freeman, who portrays Watson, and his real-life wife Amada Abbington, who had the Mary role, have separated.

I obviously do not know either actor personally, but this makes me sad. I've loved Freeman since he was Tim Canterbury in the U.K. original "The Office." And as a wife who has worked with my hubby, I enjoyed the interaction of Freeman and Abbington in "Sherlock."

The couple is British, but their personal marital travails obviously got me thinking about U.S. married couples and how their relationship status affects their tax filing. Yeah, you caught me again, the true romantic!

Most of the time, it's better to file one return jointly. But there is another option, married filing separately, that could be called for in certain marital situations. 

Married couple filing options: If you're legally married at the end of a tax year — that's Dec. 31 — then you and your spouse have the choice of filing one federal joint tax return or each of you submitting a married filing separately. 

Most married couples file the single Form 1040. Not only is it easier, but there usually are tax advantages to filing jointly. Married but separate return taxpayers often discover that many tax breaks are no longer available.

Couples claiming married filing separately (MFS) status could lose the tuition and fees and student loan interest above-the-line deductions. Also at risk under MFS are several popular tax credits, including the dollar-for-dollar tax breaks for the elderly and disabled, child and dependent care, education and the Earned Income tax credit (EITC).

Wait. There's more. Or actually less. Also affected by the MFS status are the tax-free exclusion of Social Security benefits and the phase-out range (it's much lower) for IRA deductions.

And because the MFS rules say that both spouses must either claim the standard deduction or both must itemize, one partner is likely to take a tax hit on the deduction method.

When you should file separately: OK, you say. You'll stick with married filing jointly.

Not so fast.

As is always the case with taxes and the practical and monetary hassles of MFS notwithstanding, your individual tax, personal and financial situations must be considered.

Generally speaking, however, here are six situations where MFS might be wise.

1. One spouse has a lot, a whole lot, of income. Many well-to-do couples already have to deal with the top ordinary tax rate of 39.6 percent. But since 2013, some high-income taxpayers also have faced new surtaxes. Jointly filing married couples with a combined wages of more than $250,000 in wages have to pay a 0.9 percent added Medicare tax, as well as a 3.8 percent tax on most investment income. Plus, there's the higher capital gains rate — 20 percent instead of 15 percent — for joint filers making $466,951 or more in 2016 (it goes to $470,701 or more in 2017). Determining whether splitting your wages and investment income and filing separate returns is worth it tax wise will take some work. But if you're making big bucks, you probably have a tax professional who can run the numbers for you.

2. One spouse has a lot, a whole lot, of medical expenses. If you're younger than 65, in order to deduct medical expenditures as an itemized expense on Schedule A, the doctor etc. costs must exceed 10 percent of your income (and that percentage applies to all regardless of age starting in 2017). If a husband or wife has enough costs to offset his or her separate earnings, it might be worth splitting your tax returns so that the ailing (and hopefully feeling better) spouse can deduct them.

3. Many miscellaneous deductions. Like medical expenses, miscellaneous deductions must meet a percentage of adjusted income threshold. In this case, it's 2 percent. A variety of work-related costs can be claimed in this Schedule A section, including professional dues and fees, job-search costs and unreimbursed business expenses. If one spouse has a lot of these because, for example, she traveled a lot for work or was laid off and diligently hunted for new work, filing separately against her solo income could make these costs.

4. Your spouse's former family. Many couples have had prior marriages and families. That also means money to care for those kids. If your husband or wife owes child support, the tax collector will take those overdue payments out of any federal refund. Do you want to surrender your part of the refund for your spouse's legal child care lapse.?

5. Your spouse's tax history. Does your spouse owe Uncle Sam money? Has he or she ever been audited? When you review your joint tax return that your spouse fills out, does it look like he or she is taking some tax-filing liberties that could cause some potential problems? If so, file your own paperwork with the IRS. This is particularly true if you have any concerns that what your spouse is doing tax-wise is illegal and not just sloppiness.

6. Your relationship status. I'm not talking filing status here, but your status a la Freeman and Abbington. Just how do y'all feel about each other? Have you lost, as the song goes, that loving feeling? If you're pretty sure that you and your spouse won't be legally wed for much longer, it might be time to separate your taxes along with all your other goods.

Don't forget about your state taxes: There's also one more thing for couples in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin to consider. These nine states are community property states and your state's law must be considered when deciding how to file your federal return.

And remember that most state tax departments base their filing rules on federal returns. What you do with your IRS 1040 will affect your state return, too.

Here's hoping you have a long and happy marriage, as well as many easy and tax-saving filing seasons. But taxes, like marriage, take work, so be sure you're properly filing joint or separate returns.

Disclosure: Much of this blog post first appeared as a Don't Mess With Taxes item on Aug. 21, 2014.

You also might find these marriage related posts of interest:



source http://feedproxy.google.com/~r/DontMessWithTaxes/~3/ioyCF9dvcb4/6-signs-married-couples-should-consider-separate-tax-returns.html

No comments:

Post a Comment