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!