Since same-sex marriage was legalized, the number of same-sex couples who play Tax Loophole Twister like our straight peers has increased.
We’re heading into tax season and getting a hold of your accountant may be harder than the 2016 election. Here’s the most important question same-sex spouses should ask before filing taxes: Should we file “married and jointly” or “married and separately”?
For most same-sex spouses, this question is new, the difference is considerable and the decision consequential. Here’s what you should know.
Pros & Cons of Filing Jointly
Considering the tax incentives offered to married couples, the government wants people married. (Up until recently, it just wanted the right people to be married.)
First, there’s the marriage bonus. The marriage bonus happens when there’s income disparity between spouses. If it applies, the marriage bonus puts the average income of the couple in a lower tax bracket because of the lower income earner.
Being married and filing jointly offers tax credits that may not apply if you’re married and filing separately. These credits include, but aren’t limited to Credit for Child and Dependent Care, Earned Income Tax Credits and education credits, such as American Opportunity and Lifetime Learning Education Credits. Joint filers also have higher income thresholds for deductions, which means they can qualify for incentives while making more money.
Credits and deductions lower the net total in taxes couples pay. Qualifying for them keeps more of your hard-earned money as income.
Married life and taxes aren’t all roses, though. The con with married and filing jointly is the marriage penalty. Married couples without income disparity can be bumped into a higher tax bracket than when they filed as individuals or if they filed separately.
Filing jointly poses a risk if your spouse has tax problems. If your spouse has tax liens or owes the government money, you may become responsible for their burdens. If you file separately, you’re shielded from such risks.
Pros & Cons of Filing Separately
Certain deductions that require a percentage of your Adjusted Gross Income (AGI) are more easily achieved with the lower AGI from filing separately rather than jointly. For example:
Miscellaneous expenses that are more than 2% of your AGI may be deducted
Emergency expenses over 10% of AGI may be deducted
One of you may qualify to contribute the max for a Roth IRA, whereas jointly neither of you might qualify
However, you’re off the hook for tax liabilities your spouse may have if you file separately. Doing so might shield certain assets from the government.
Going solo isn’t a bed of roses, either. Filing separately lowers deductions for Traditional Individual Retirement Account (IRA) contributions. While it’s good to invest in an IRA regardless, this reduces immediate benefits.
Along with the other tax deductions and credits afforded to couples who file jointly, you can’t take the student loan interest or tuition deduction if you file separately.
If this all sound confusing, that might be the point. Therefore, consult your tax professional.
