You could save tons of money on your taxes by choosing to file jointly or separately with your spouse - here's how to know which is best
For married couples, one significant way to save money on taxes is determining whether you and your spouse should file your tax returns jointly or separately.
In the vast majority of cases, you'll save money by filing jointly - especially if one spouse works and the other doesn't, or one spouse out-earns the other significantly.
If you and your spouse both work and have comparable incomes, do the math on both a separate and joint filing to see which saves you more money, suggests Beth Kobliner in the latest edition of "Get a Financial Life: Personal Finance In Your Twenties and Thirties." Every couple's situation is different.
In general, there are a few major benefits to married filing jointly (MFJ):
- Access to valuable tax breaks and credits, including the earned income tax credit, child and dependent care tax credit (if you have kids), deductions for college tuition, student loan interest deductions, and traditional IRA deductions.
- If one spouse makes more than the other, combining your incomes could bring the higher earner into a lower tax bracket. See 2016 tax brackets on the IRS website.
- A standard deduction of $12,600 in 2016 from your adjusted gross income (your and your spouse's combined income), meaning your taxable income is reduced.
Here are some key points to consider about married filing separately (MFS):
- Fewer available tax breaks or credits - excluded from earned income, dependent care, college tuition, and student loan deductions. Less likely to qualify for IRA deduction.
- More time and money spent filing two tax returns.
However, filing separately does save some couples money. One of the primary reasons couples choose to file separately is if a spouse claims an itemized deduction that would exceed the amount of their standardized deduction, like medical bills.
"Say you and your spouse each earns about the same amount of money, but you have exceptionally high medical bills. If you file a joint return, your medical bills would have to exceed 10% of your combined AGI [adjusted gross income] in order to be deductible.
"If you file separately, you can deduct medical costs that exceed 10% of your own AGI (about half the combined income, so you get to deduct more)."
Remember, though, that itemizing deductions will disable either spouse from claiming their separate standardized deduction of $6,300 (half of the amount you would get filing jointly). This is one reason why it's so important to do the math.
Not to plant the seeds of doubt, but filing separately is also smart if you suspect your spouse may be committing tax fraud, because you'll be protected from any shady behavior.
Keep in mind, if you and your spouse work or live in different states, your state may require you to file separately in your state and jointly for your federal returns - except if you live in a community property state where all marital assets are considered joint property - to ensure you won't be taxed twice (in your state and your spouse's state) on the same income.
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