NEW YORK -- (MainStreet) -- So you got married in 2011? That's great, but the Internal Revenue Service doesn't have all year for you and your spouse to decide how you'll file your taxes.
There is one basic truth for newlyweds during tax season: Whatever your marital status was Dec. 31 is what the IRS considers you for all of 2011. From there it gets a bit more complicated.
|Joint tax filing is usually the best way to go, but medical bills and "risky spouses" can get in the way.|
A married couple's first kiss after taking their vows essentially kisses both of their "single" tax filing statuses goodbye. From here on in, they're left with two options: married filing jointly and married filing separately. The former generally results in the lightest tax hit by giving couples a few breaks, including a credit for child- and dependent-care expenses, deductions for student loan interest and a lifetime learning credit. This wasn't always the case, but George W. Bush's tax cuts in 2001 and the Tax Relief Act in 2010 helped expand the lower tax brackets for joint filers and make it a bit easier on big earners and their low-earning spouses.
"Historically, two singles cohabiting would pay less than a married couple, but that was changed with the Marriage Penalty Relief Act," says David B. White, certified public accountant and president and founder of David B. White Financial in Bloomfield Hills, Mich. "Generally speaking, married filing jointly is going to be lower than married filing separately, especially if there's an imbalance of earnings where you would forfeit expenses and deductions for the person who doesn't have much income."
A couple's tax decision also has a great effect on their plans for retirement savings. When a couple files jointly and one spouse isn't working, the working spouse can make a contribution for the nonworking spouse that wouldn't be allowed if they're filing separately. Also, the $10,000 limit on Roth IRA contributions for those filing separately is much lower than it is for joint filers.
Filing separately doesn't help when it's time to balance the books, either. Couples filing jointly can deduct $3,000 in capital losses against ordinary income. Those filing separately, however, can deduct only $1,500 in losses and can't use one spouse's losses to offset another's gains.
It's a big reason why only 4.5% of married couples filed separately in 2009, the last year for which data were available. Married couples filing separately made up less than 2% of all returns filed that year, but that didn't necessarily mean they were making the wrong call.
"MFS tax rates are higher than single and some of the benefits otherwise available, like deducting interest on student loans and the education tax credit, are reduced or eliminated," says Mickey Cargile, CFP, managing partner at Cargile Investments. "However, if one spouse has high itemized deductions, like medical expenses, it may be better to file MFS."
For argument's sake, let's say one spouse has an adjusted gross income of $100,000 per year and the other's comes out to $25,000 per year. Let's also posit that the second person racked up $5,000 in unreimbursed medical bills that same year. Since medical expenses at and above 7.5% of adjusted gross income are deductible, a couple would be better off filing separately and making that $5,000 a solid 20% of the lower earner's income instead of just 4% of the couple's combined income.
Of course if your spouse is notoriously bad with money or is already souring on the relationship somehow, filing separately may seem a lot more appealing. Anthony Criscuolo, CFP for Palisades Hudson, says a "risky spouse" can make joint filing a dodgy proposition if they like to take aggressive positions on a tax return or take their chances with a Schedule C itemized return for their small business.
"Usually when you're filing a joint return, what you're saying when you sign that return is that it's a true, accurate return," Criscuolo says. "In some situations, a spouse isn't auditing their other spouse and making sure everything is claimed and reported properly."
White says he has encountered married clients who will cover up the numbers on the couple's tax return and simply ask their spouse to sign it. Not only should a spouse never do such a thing, but they should file separately without hesitation.
"The biggest reason that I know of that people file separately is distrust: If you expect dishonesty or that someone is overstating deductions, understating income or you think there are hidden assets, then you don't want to put your name on a tax return with somebody else," White says. "I have clients that file separately for that very reason, and there's an 'innocent spouse' law to help protect you, but that's a little bit like going to traffic court to prove you're innocent after you've been given a ticket. It's better not to get the ticket in the first place."
So how do you know for sure which filing method will work best for you? Folks who file their own taxes are going to want to use some tax preparation software to compute their return for joint and separate filing and compare the results. If tax returns are prepared for a couple by a third party, this will usually happen automatically.
Before that happens, however, a couple will want to make sure all financial information is in order before facing the IRS unprepared. White recommends doing a dry run on a tax return early in the year just to make sure the withholding on a couple's combined income is sufficient to make up for the hike in earnings since they were single.
If a couple is filing electronically, a spouse changing his or her name will want to notify Social Security immediately to ensure that all the information matches up. If there are children coming into the family whose names are changing as a result, their Social Security information will have to change, too. Form SS-5 is an easy way to make the switch. If a couple is moving after the wedding day, they'll want to cozy up to form 8822 as the best way of keeping the IRS apprised of the change.
"You don't want to wave a red flag and draw the IRS' attention," White says. "This is a government agency with unlimited funds and unlimited time, so they are not someone you want to have as an opponent. "
-- Written by Jason Notte in Boston.
>To contact the writer of this article, click here: Jason Notte.
>To follow the writer on Twitter, go to http://twitter.com/notteham.