Filing taxes can be an extremely difficult task. There are so many rules and regulations that it can make your head spin. Additionally, when you are married and considering how you should file, things can get even more complicated. Discovering if filing together or separately will yield the most benefits is a question which needs to be thoroughly researched. While there is no clean-cut answer and most people opt for filing together due to the tax breaks you can receive, there are some cases where filing separately may actually be of greater benefit to you and your spouse.
1. One of you is self-employed
The rules for those who are self-employed (freelancing, independent contracting, etc.) are very different from those who are working the more traditional 9-5 job. This is due to the fact that you are not only paying income tax, but you are also responsible for covering your own Social Security and Medicare tax. Since this is not coming out of your paycheck, self-employment tax rates for 2015-2016 were 15.3%.
Because of the differences in what you will have to pay, you are generally expected to make estimated quarterly payments to cover your taxes. If you have not been doing this, or you underestimate how much you will need to pay, this could set you back greatly and result in a large sum being taken from your refund. For those who are self-employed, it is sometimes advisable to file separately from your spouse. While you may lose some tax benefits, in the end, you may have to pay fewer taxes. It is important to weigh both sides in order to see which way you and your spouse will come out better in the long run.
2. You’re struggling With student loan debt
Debt deriving from paying for college is something which impacts approximately 70% of Americans. It is said the average debt for college graduates is around $30,000. This high number coupled with the difficulty of finding a job these days often presents young adults with many headaches. If you decide to repay your student loans through an income-dependent plan, this can become a little tricky when you are married.
The reason for this derives from the fact that if you and your spouse file together, your joint income will be considered for this type of repayment plan even if only one of you has debt. Therefore, when you file by yourself, only your income is considered in determining the kind of payments for which you qualify. Once again, in the process of filing separately you may lose specific deductions. However, if you do not have kids and take out standard deductions, the pinch will not be as drastic.
3. You have a lot of itemized deductions
Deductions are a great asset to utilize when doing your taxes as they help to reduce the amount of taxes you will have to pay. However, it is important to note the IRS does have an established limit of how much you can take off based upon your annual income. For this reason, it is important for you and your spouse to examine your deductions to see if separate or joint filing will give you the greater benefits. If you discover you both have numerous deductions you plan to claim, yet there is a substantial gap in what you earn, then filing separately would be the best route.
For example, if in the previous year, you paid a substantial amount of out of pocket medical expenses, you are allowed to deduct any amount which exceeds 10% of your adjusted gross income. If you have only earned around $25,000 within the past year, then you have a good deduction. However, if your spouse makes $150,000 and you decide to file taxes together, you are increasing your income and therefore increasing the 10% bracket. In a case such as this, it is a good idea to consider filing separately, allowing you to increase your deductions and reduce your out of pocket expenses.
In conclusion, these are just a few of the factors which married couples need to consider when filing their taxes. In situations where you are planning to divorce or you are concerned about being liable for your spouse’s tax debt, then it is advisable to file separately. However, in other cases, where the answer is not so clear, it is always a good idea to configure the numbers in order to discover the best way of receiving a good outcome on your taxes.
*This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.