One of the first entries on your federal tax return – and often one of the easiest – is your filing status. In fact, you may not have a choice. For instance, if you’ve never been married and live alone, you can only file as a single taxpayer. There’s no decision to be made.
However, things can get more complicated for other taxpayers, especially if you’re married. Usually, you and your spouse will come out ahead by filing a joint tax return, but it’s not automatic. In some cases, you and your spouse might opt to file separate returns as married individuals, due in part to the so-called “marriage penalty.”
Here’s the lay of the land: In the lowest tax brackets, the taxable income range for joint filers is double the range for single filers. For instance, using 2016 rates, the range for the 15 percent bracket for joint filers is between $18,550 and $75,300, double the range of $9,275 to $37,650 for single filers.
However, in the higher tax brackets, the range for joint filers is a lot less than double the range for single filers. For example, the top 39.6 percent bracket begins at $415,050 for single filers and $466,950 for joint filers.
Typically, the marriage penalty is triggered when one spouse earns roughly the same amount of income as the other spouse and the couple doesn’t benefit from the joint rate structure. Nevertheless, filing jointly is still preferable for most married couples when you take all tax aspects into account, unless one spouse has a disproportionate share of deductions limited by a tax law threshold, such as medical expenses.
For 2016, the deduction threshold for medical expenses is 10 percent of adjusted gross income (AGI), or 7.5 percent of AGI for taxpayers who are age 65 or older. (The threshold for all taxpayers will be 10 percent of AGI for the 2017 tax year.)
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Example: Jack and Jill are a married couple. Jack, who works full-time, has $190,000 of AGI in 2016. Jill, who is a part-timer and also does free volunteer work, earns $10,000 a year. Let’s assume that Jack incurred $1,000 in unreimbursed medical expenses in 2016, while Jill had surgery and other medical treatments costing her $9,000 out of pocket.
If Jack and Jill file a joint tax return, they get no medical deduction. Why? Their total unreimbursed medical expenses of $10,000 do not exceed 10 percent of their combined AGI of $200,000. However, if they file separately as a married couple, Jill is entitled to a medical deduction in excess of 10 percent of her AGI, which is $1,000. Based on these facts, she can deduct $8,000 ($9,000 – $1,000).
The difference may be even greater for taxpayers who are older than age 65 and benefit from the 7.5 percent threshold in 2016. And similar results may occur if one spouse has a disproportionately high amount of miscellaneous expenses or casualty losses.
But this is just focusing on limited aspects of a return. A married couple will generally realize other benefits from filing jointly, including offsets of capital gains and losses and bigger deductions and credits. Finally, you must consider the impact that filing separate federal returns will have on the state level.
Bottom line: Have your situation analyzed in its totality.
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