This week , Nadine tweets: I got married in July. Should we file taxes together or separately for 2012?
I gave the following answer in my column Yahoo!Finance. For more, check out the full AskFarnoosh article, which also includes answers to one Facebook fans’s student loan questions:
As a married couple, there are myriad financial decisions to make over the next several years as husband and wife, but the one that creeps up on you the quickest is often regarding good old Uncle Sam. How to file your taxes? You have two choices: Married Filing Jointly (MFJ) or Married Filing Separately (MFS).
There are a number of considerations to make before designating your status (more on that in a second), though it’s clear that the IRS plays favorites and prefers couples to file jointly. File separately and you may lose the ability to claim key tax benefits such as the student-loan-interest deduction and the earned-income credit. You’re also left with a lower income phase-out range for deductions. What’s more – you both need to choose the same method of recording deductions – standard or itemized. In short, this filing status tends to result in the bigger tax bill and it’s why many accountants advise their clients to file jointly.
That said, there are a few notable advantages to filing separately, which may appeal to you and your spouse. For example, if one of you greatly depends on itemized deductions to lower your taxable income, filing jointly may require reporting a much larger, combined adjusted gross income, which may reduce your chances of being able to itemize some major deductions. Popular itemized write-offs that are limited by AGI, for example, include medical expenses (which must total 7.5% of AGI before the deduction kicks in for 2012), personal casualty losses from theft, accidents or destruction (must total 10% of AGI), and other miscellaneous itemized deductions ranging from accounting fees to unreimbursed business expenses related to work, which must total over 2% of AGI before taking effect.
Another reason you may want to file separately is to offset potential financial risks or tax liabilities. Does your spouse or his tax preparer take certain liberties you’re not comfortable with? In that case, you may want to file separately for peace of mind that if an audit does crop up down the road, you won’t be on the hook, too. This probably isn’t something on too many newlyweds’ minds, but it’s unfortunately a price some couples pay for filing jointly. “Separating the liability from your spouse could prove to be a good and smart thing versus everyone going down with the ship,” says Joshua Jenson, a CPA in Edmond, Okla.
Finally, the state you live in may simply dictate what’s best. If you live in one of the nine so-called community property states (Arizona, California, Louisiana, New Mexico, Nevada, Idaho, Texas, Washington and Wisconsin), you may find it more convenient to file jointly, since your state requires you to go halfsies on most – if not all – income and deductions earned while married. If you file separately, there may be some added steps, such as reporting half your spouse’s income, in addition to yours.
Photo Credit: Tax Credits on Flickr