During year-end, a taxpayer’s filing status is determined by his or her status of marriage. The tax department considers a couple to be married for the whole year if they tie the knot, even if that’s the last day of the tax year. Filing jointly or separately are the two alternatives available to married couples. For those who have always reported themselves as single, either change in status can bring about unexpected outcomes.
When filing taxes as a married couple, both partners’ incomes must be added together. If both partners are employed, this might result in a variety of unpleasant shocks, as many tax benefits are phased out or lowered for taxpayers with higher incomes. Some of the most common problems brought on by increased wealth with which a Rochester Hills, MI CPA can help are listed below.
- falling into a higher tax category, which would increase capital gains tax rates
- Limiting the tax credit for childcare
- Putting a cap on IRA deductions
- creating a tax on investment gains that is levied exclusively on those with higher incomes
- triggering a levy on retirees’ Social Security checks
- The Earned Income Tax Credit is being reduced.
- Medical cost-sharing reductions or elimination
The loss of tax benefits that apply to jointly filing higher-income taxpayers is typically not mitigated by filing separately, as the tax system incorporates safeguards to prevent married couples from doing so.
However, if only one spouse earns money, filing jointly usually results in a lower tax burden due to lower joint tax brackets and a bigger standard deduction, twice that of single filers, if no itemization is done. Furthermore, on a joint return, you may be able to decrease or eliminate certain of the higher-income limitations that would otherwise apply to a single taxpayer with the same amount of income.
How should you fill out your tax?
In most cases, the combined tax liability of a married couple will be larger if they file jointly rather than as married filing separately.
While filing a joint tax return, they do not owe taxes on their combined Social Security (SS) payments until their total income, including all income sources, is more than $32,000. In the case of a married couple filing separately, the taxable threshold is decreased to zero if the spouses share living expenses at any point during the year.
When deciding how to file their taxes, married couples should think about more than just the total amount of tax they owe; filing jointly makes both spouses legally responsible (or “jointly and severally liable”) for any tax, interest, or penalties associated with their returns. This holds true even if they end up getting a divorce. In the case of a “married, but filing separately” couple, each spouse is solely liable for his or her own tax obligations.