LedgerCore Financial

Tax Talk Tuesdays!

We get many questions during tax season (and throughout the year), and we’ll be sharing some of them - and the answers - here through April 18th!

QUESTION:

My spouse and I think we should file separate returns this year because one of us has so much more income and/or one of us has lingering tax issues that we want to shield from the other. Is this a good idea?

ANSWER:

For married couples it is rarely a good idea to file separately. There are two main reasons:

1. The filing status of Married, Filing Separately shifts your income into higher tax brackets at lower dollar amounts. For demonstration sake, let’s say that the Married, Filing Jointly tax brackets starts taxing your income at the 10% rate at the 20,001st dollar and then shifts to the 15% rate at the 50,001st dollar and the 20% rate at the 75,001st dollar (and so on), but the Married, Filing Separately tax bracket starts taxing your income at the 10% rate at the 10,000th dollar, the 15% rate at the 40,001st dollar, and then at the 20% rate at the 60,001st dollar (and so on). This means that income is taxed at a higher rate at lower dollar amounts. This is not favorable.

2. If you live in a community property state (like Texas) and you use the filing status of Married, Filing Separately, you are allowed to report only half of your income on your return, but you are also *required* to report half of your spouse’s income. So, when combined with the less-favorable tax bracket shifting described in 1, you will both be paying a much higher rate.

Certainly, there are situations where paying the higher tax is still a better option, but - for the most part - married couples should avoid filing separate returns.

As always, ask your tax preparer for more information!

Tax Talk Tuesdays!

We get many questions during tax season (and throughout the year), and we’ll be sharing some of them - and the answers - here through April 15th.

Question:
I think/know I'm going to owe taxes on my 2025 tax return, but I can't afford to pay by April 15th. Can I request an extension and file my return when I can afford to pay the tax owed?

Answer:
Certainly, you can file an extension. But, the extension is to extend the deadline for FILING, *not* paying.

What does that mean?

Well, it means the IRS will assess interest and penalties on any unpaid tax from April 15th regardless of whether an extension has been filed.

This is true whether you file by April 15th and pay later, or extend and pay later; it makes no difference. The filing of an extension merely ensures the IRS doesn't assess the "Late Filing" penalty, but they *will* assess late paying penalties.

As always, ask your tax preparer for more

Tax Talk Tuesdays!

We get many questions during tax season (and throughout the year), and we’ll be sharing some of them - and the answers - here through April 15th.

Question:
My spouse and I both have jobs and we file jointly. We both filled out page 1 of our W-4s at our respective jobs, so how can it be that we owe tax at filing time??

Answer:
In order to answer this question, we need to explain the concept of tax brackets.*

A tax bracket is a chunk of taxable income that is taxed at a specific rate, like, let's say the 10% Tax Bracket is the 1st taxable dollar through the 10,000th taxable dollar, and the 15% Tax Bracket is the 10,001st taxable dollar through the 50,000th taxable dollar, and the 20% Tax Bracket is the 50,001st taxable dollar through the 100,000th taxable dollar, and so on...

So, say you make $65,750 and your spouse also makes $65,750:

* If you were single, each filing a separate tax return, and each taking the standard deduction, you would each have taxable income of $50,000. Then, the 1st through 10,000th dollars of that would be taxed at 10%, and the 10,001st through the 50,000th dollars would be taxed at 15%.
* BUT, since you're married and filing jointly, you have combined taxable income of $100,000 (after the standard deduction), and the 1st through the 10,000th dollars of your combined taxable income is taxed at 10%, the 10,001st through the 50,000th dollars of your combined taxable income is taxed at 15%, and the 50,001st through the 100,000th dollars of your combined taxable income is taxed at 20%.

In the second scenario, all of YOUR taxable income dollars have fallen into the same brackets as they did in the first scenario, but all of your SPOUSE'S taxable income has fallen into much higher brackets than if they were taxed on their own.

In other words, your spouse's 1st taxable dollar is - as a couple - your 50,001st taxable dollar and that combined 50,001st taxable dollar through your 100,000th combined taxable dollar is taxed at 20%, a much higher rate than the 10% and 15% it would be taxed at by itself.

The withholding calculated by your spouse's (or your) job's payroll system has not taken this into account... and that is why many couples owe at tax time. To avoid this, married employees should fill out ALL pages of their W-4 forms. In addition (and if necessary) employers can be directed to withhold extra amounts from each paycheck.

(* For the sake of a simplified explanation, these are made tax bracket thresholds AND we are implying that tax bracket thresholds are the same for all filing statuses, though - in reality - they are not. However, this gives a general idea of why many couples fall short in their withholdings.)

A COMMON PIGGY-BACK QUESTION to this question is “Can my spouse and I simply file separate returns to get around this?”

Well, yes, BUT… in community property states like Texas, married taxpayers who file separately are required to report half of their spouse’s income on their separately filed returns (and vice-versa), thereby eliminating any benefit.

As always, ask your tax preparer for more information!

Did you know?

LedgerCore provides tax services that are entirely virtual, with no office visit required!

Clients submit their tax information electronically via our secure portal and all returns are e-filed.

E-mail [email protected] or call (214) 884-2020 for your free tax packet that will help you gather your tax information for your tax preparer!