It's tax time - rethink your filing status
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Married couples have the option to file their annual tax returns on a Married Filing Jointly (MFJ) or Married Filing Separately (MFS) basis. Most couples auto-opt for MFJ without giving it a second thought. Today we'll take a look at why you may want to pause and weigh MFJ versus MFS and when it benefits you to file a return apart from your spouse.
If Your Spouse Has Tax or Child Support Troubles
If your spouse is self-employed or an independent contractor and hasn't paid enough in estimated taxes to cover their bill, you may want to file separately. For those whose spouses already have tax problems and are likely to get in deeper with the IRS, you may want to draw a line in the sand so that you're not also in tax trouble. MFS protects your wages from garnishment by the IRS if the taxman decides to come calling for the back taxes. Also, if your spouse is delinquent on child support payments, their refund may be seized to cover the delinquency. While it's reasonable that they lose their refund, that doesn't mean yours should as well since it's not your support obligation.
If Filing Together Will Raise Your Tax Bracket
If you and your spouse separately are in a lower income tax bracket, you'll each pay less in taxes individually in some cases. It pays to look at your taxes together and apart. When your adjusted gross incomes together move you into a higher tax bracket, you may want to file separately to save on income taxes. There's nothing illegal about filing separately to lessen your tax bill. Just be aware that if you have children, you both can't take them. If you have more than one child, you may want to each take one deduction or see if it's more advantageous for one of you to claim both.
If You Have Miscellaneous Deductions
If you have miscellaneous deductions that can't be claimed on a joint return, calculate whether they could be claimed on separate returns. For miscellaneous deductions to be deductible, they have to exceed 2% of your adjusted gross income - this is a much higher threshold with combined incomes. These expenses include union dues, unreimbursed business expenses and job search costs. The important thing is to compare the gained deduction against any deductions you would lose by filing separately. Those that file under MFS cannot take the following deductions:
- Tuition and fees
- Student loan interest
- Elderly and disabled credit
- Child and dependent care
- Earned income credit
- Educational credit
If You Have Student Loans and Want a Lower Payment
If you are paying on your student loans and want to take advantage of one of the lower repayments plans like Income Based Repayment (IBR) or Pay As You Earn (PAYE), you'll get a lower payment with MFS. Here's why. If you file MFJ, your payments will max at either 10% or 15% (depending on IBR vs PAYE) of your disposable income. AGI will obviously be higher when you combine your incomes. If you choose MFS, the payment will be based solely on your income. However, you won't be able to use the student loan interest deduction. Thus, you need to see how much more you'll pay in income taxes by losing that deduction versus how much you'll save on lower student loan payments.
It can be a challenge to sit down with pen and paper and crunch the numbers for yourself on which tax filing option is preferable for your unique circumstances. Consider purchasing tax software so you can finagle your numbers and experiment to find the best option. Or, hire a tax professional to run the numbers and advise you whether MFS or MFJ will best accomplish your goals.
If you are struggling with student loans, back taxes and living paycheck to paycheck, contact the law offices of John T Orcutt for help. Our North Carolina bankruptcy experts are ready to look at your financial circumstances and let you know if Chapter 7 or Chapter 13 bankruptcy can get you the debt relief you deserve. Call 1-888-234-4181 for a free consultation in Raleigh, Fayetteville, Greensboro, Durham, Wilson or Garner.