Most married couples file their taxes jointly. This approach enables them to combine their income and utilize larger deductions or tax credits. For instance, the married filing separately child tax credit is much more limited in comparison to a joint return. Above all else, when you decide whether to file jointly or separately, it is important to keep in mind that segregating your expenses may be very time consuming.
However, some spouses end up paying more taxes when they file a joint return. This is particularly true when their combined income puts them in a higher bracket than if they each filed their own taxes. Equally as important, when two spouses have different consumption habits, a combined return might make it difficult for them to maximize their deductions.
So should you file jointly or separately? The latter approach is especially beneficial when the two spouses have different consumption habits, expenses, and insurance needs. While the married filing separately child tax credit may be a hassle to some households, those with one minor son/daughter or limited childcare expenses might not feel an impact.
The Infamous Married Filing Separately Child Tax Credit
The 2017 Tax Cuts and Jobs Act (TCJA) increased the tax credits that parents may take advance of. Unlike a tax deduction, which reduces your taxable income, a credit is directly taken out of your tax bill.
For example, if a household made $100,000 in a year, they must pay 24% (or $24,000) to the IRS. With a $10,000 deduction, their taxable income of $90,000 only comes with a $21,600 tax bill (24% of $90,000).
If the same household had a tax credit of $10,000 (instead of a deduction), the IRS will take the amount off their $24,000 bill. As a result, the household only owes $14,000 in taxes.
When deciding whether to file jointly or separately, many people will consider the children’s tax credit as a major factor.
In general, parents can get up to $5,000 per child in tax credits. Additionally, low-income and working class families may qualify for more.
Utilizing the Married Filing Separately Child Tax Credit
When a couple submits their finances jointly to the IRS, both of them may claim the childcare-related credits. However, when it comes to those who file separately, only one parent can take advantage of this tax credit.
Nonetheless, this shouldn’t be a major problem to those who only have a single child, even more so when one bank account or credit card takes care of these parenthood expenses.
Not only does this minimize the time-consuming task of compiling paperwork, but the IRS also requires that. To clarify, only the parent who took care of most of a child’s expenses can claim the credits.
If a couple does this equally or uses multiple bank accounts, then the credit is only available to the higher-earning spouse.
File Jointly or Separately: Itemized Deductions
Certain expenses, such as medical costs and business bills, can be used tax deductions. Generally speaking, you have one of two options: Either utilize the standard deduction (where all deductible costs are combined) or an itemized one (which requires you to categorize each expense separately).
This is another aspect that varies based on whether you file jointly or separately. If a household chooses the former approach, their maximum standard deduction is $24,400.
If one spouse, alone, has $20,000 in deductible costs, while the other has $4,800, a joint return would benefit them more. Yet when they file separately, each spouse gets $12,200. As a result, the former would be impacted negatively.
However, certain situations may make a separate return more advantageous. To illustrate, let’s say that a married couple has two different costs. The wife is a business owner who spent $30,000 on deductible expenses.
The husband, meanwhile, has $10,000 in deductible medical payments. When combined, their total deduction is $40,000, which means that the household would miss out on a lot when they use the $24,400 married filing jointly standard deduction.
Similarly, if they itemize their tax returns, they can only use a maximum amount on each category (for example, medical costs, business expenses, …etc.).
The married filing separately rules, in this specific scenario, can work toward’s the couple’s advantage. Firstly, the husband’s $10,000 in medical costs, on a separate tax return, would all count as part of the standard $12,200 deduction.
Secondly, the wife may itemize the different business costs (such as payroll, office rent, …etc..) and qualify for a $20,000 deduction or more. After that, the household’s total tax deductions become $30,000, which is much more desirable than the standard $24,400 that they would get by filing jointly.
To clarify, when they submit their return together, only a portion of the husband’s medical costs may be itemized, especially after it reaches the maximum allowed under this category.
Most of the time, the average monthly health insurance cost is tied to an individual or family’s income. In short, the more money that they earn, the less subsidies they receive on their premiums (which means that they have to pay more).
In our example above, let’s assume that the husband makes $80,000 per year and gets coverage from his workplace. The wife, on the other hand, must purchase her own policy as a business owner. She makes $60,000 per year.
If the household files jointly, their total income would be $140,000. As a result, the wife may have to pay higher health insurance premiums. However, by filing separately and reporting a lower income of $60,000, her policy would cost much less.
In fact, this is even more advantageous when combined with a strategy that enables the household to maximize their deductions.
Should I File Jointly or Separately? Key Considerations
The married filing separately rules are not for everyone. More specifically, a household that combines their spending and utilizes the standard deduction (as opposed to an itemized one) is better off when the couple files jointly.
Equally as important, the married filing separately child tax credit doesn’t suit families that spend a lot on their children.
Nonetheless, if your offspring’s expenses are minimal, your costs are different than your spouse’s, and each of you has their own medical needs, a separate filing may have plenty of advantages.
If you are considering this option, review your budget, bank statements, and spending habits. By changing your strategy, you might end up saving thousands of dollars on taxes, insurance, and other related costs.