6 signs it's time for married couples to reconsider their federal joint or separate tax-filing options
Former Virginia Gov. Bob McDonnell and his wife Maureen are on trial, facing charges of taking $177,000 in gifts and loans from Star Scientific in exchange for promoting the firm's dietary supplements.
But the former first couple of the Old Dominion has more than just legal and political troubles.
That was obvious with the defense's first inkling of how it would approach the case: The couple was so estranged that they couldn't have conspired to do anything.
As the trial has progressed, with each spouse fielding a separate defense team, the missus is coming off worse, at least so far in the public perception arena.
McDonnell's courtroom advocates have portrayed him as an upstanding role model. Meanwhile, Mrs. McDonnell is being painted as an angry and unstable woman who hated being Virginia's first lady.
I'll let the legal proceedings sort things out as far as the charges. And marriage counselors and/or divorce attorneys can have at it after the corruption trial ends.
Married couple filing options: But the apparent demise of the McDonnells' marriage has me thinking about, what else, taxes in such situations.
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 1040.
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 $457,600 or more in 2014.
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. 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 deductible.
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 the McDonnells. 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.
You also might find these marriage related posts of interest: