If you’re married, it’s better to file a joint tax return, rather than separately … right? That’s usually true, but not always. It depends on your situation.
Deductions may play a role in your return status
Generally, the tax rate structure encourages couples to file joint returns. Nevertheless, you may be better off filing separately if one spouse has a disproportionate amount of expenses subject to a deduction “floor.”
For example, say your annual adjusted gross income (AGI) is $150,000, while your spouse is a part-timer with an AGI of $20,000 a year. In 2018, you had unreimbursed medical expenses of $1,000, but your spouse incurred $9,000. Under recent legislation, the floor for deducting medical expenses in 2018 is 7.5 percent of AGI. (It reverted to 10 percent of AGI in 2019.)
If you file a joint return, you get no medical deduction even if you itemize, because your total expenses of $10,000 doesn’t exceed 7.5 percent, or $12,750, of your combined AGI.
However, things change if you and your spouse file separately. While you still won’t get a deduction, your spouse will be able to deduct the excess above 7.5 percent of their AGI, or $1,500. So your spouse’s deduction is $7,500 — a big difference!
Filing separately wont help with state and local taxes (SALT)
The new law limits the annual SALT deduction to $10,000 for 2018. So if you live in a high-tax state, you may think that filing separately would provide a higher combined SALT deduction. No so. The annual limit is $5,000 for married couples filing separately.
For instance, if you pay $9,000 in SALT and your spouse pays $1,500, you can deduct $10,000 if you file jointly. But filing separately would provide a $5,000 deduction for you and $1,500 for your spouse, for a total deduction of only $6,500.
Truth be told, your return status depends on your unique circumstances. Call Carl Heinemann, your Chattanooga CPA, for help with determining the best approach on your tax return.