Every year, many people find themselves facing head on the beast known as the “marriage penalty”. We are no tax specialists or financial advisors here at A Penny Saved… but if you do have a tax specialist or accountant, you might want to consult them.

As a newly married person I find myself facing the dilemma of filing taxes as a married person for the first time this year. There is a lot of talk about the “Marriage Penalty” and whether it is better to file jointly or seperately. I’ve tried to sort through quite a bit of info to find an answer and the one solid thread through all the info is that the tax code is so complex on this issue that only a tax professional can really help you make the absolute best solution.

While researching the subject, I found myself trying the IRS website and finally falling back on my old mainstay when I want financial advice. Motley Fool. The first thing that I learned was that filing seperately does not necessarily literally mean seperate.

remember that filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use the “married, filing separately” rates. These rates are based on brackets that are exactly half of the “married, filing jointly” brackets, but are still less-favorable than the “single” rates. This means that the “marriage penalty” can’t necessarily be eliminated simply by filing separate returns.

So if filing seperately doesn’t mean literally seperate, what are the benifits of filing seperately? Why is it even talked about? Well, you guessed it. It all comes down to numbers. Certain tax breaks come and go depending on what you and your spouses Adjusted Gross Income come up to. The majority of the down sides to the filing seperate come when a couple make a AGI of over $140,000. The upsides? Well, they usually occur when one spouse makes less than the other. For instance, if you make $75,000 and your spouse only makes $20,000, your spouse may have a much better chance of claiming any non-covered medical expenses. The reason is that the total of the medical expenses must exceed 7.5% of the filers AGI. So 7.5% of $20,000 is quite a bit less than 7.5% of $95,000. Here’s a list of more of the downsides of filing seperately from Fool.com:

  • The child and dependent care credit, adoption expense credit, and Hope and Lifetime learning credits are only available to a married couple filing a joint return.
  • You can’t take the credit for the elderly or the disabled if you file separate returns unless you and your spouse lived apart for the entire year.
  • You cannot deduct qualified education loan interest unless a joint return is filed.
  • You may not be able to deduct contributions to your IRA if either you or your spouse was covered by an employer’s retirement plan and you file separate returns.
  • A Roth IRA contribution or conversion is virtually out of the question.
  • You cannot exclude adoption assistance payments or any interest income from series EE savings bonds that you used for higher education expenses if you file separate returns.
  • Social Security benefits are, in some instances, more heavily taxed for a couple filing separately. The benefits are tax-free where modified AGI does not exceed $32,000 for a joint return, but the base amount is zero on a separate return.

After filtering through most of the information(and trying to find some on the IRS website) I believe that my wife and I will most likely be filing jointly. We don’t make enough income to need to seperate it out for deductions and with a child on the way, we’ll have to file jointly for a while anyways if we want to take advantage of the Child Care Credit. Plus, most deductions can only be claimed by one person or the other. They cannot be split. That makes it awfully hard for us to deduct our Mortgage insurance and other deductions.

Categories: Tax