“Should we file our taxes jointly or separately?” This question most frequently comes up after a recent marriage or divorce. Two of my clients, George, and Nancy, recently asked me for help with this question. They married in early 2020 and before the end of the calendar year, they also had a baby. While George and Nancy are a younger couple and now with a child, the considerations also apply to older couples who marry and bring their separate incomes, investments, and children into a newly blended family unit.
George’s 2020 adjusted gross income was $65,000 and Nancy’s was $45,000 for a combined total of $110,000. Below is a list of several tax benefits clients like George and Nancy need to consider when deciding if they should file jointly or separate.
By filing jointly, the couple is eligible to take the standard deduction of $24,800 and claim student loan interest on Nancy’s student loan as well as her tuition and fees deduction or education credit. With the newborn, they also qualify for childcare credit along with the child tax credit.
If they file separately, the following illustrates some, but not all items that are reduced to half of what they would get on a joint return:
- The limit on income excluded under an employer’s dependent care assistance program is $2,500 versus $5,000 on a joint return.
- The standard deduction amount is only $12,400 versus $24,800 on a joint return. However, if one of them itemizes deductions, the other is not eligible for the standard deduction and must itemize or take no deduction.
- The capital loss deduction limit is just $1500 versus $3,000 on a joint return.
- While they’re way under the limit, it’s good to know that the child tax credit income limit is $200,000 versus $400,000 on a joint return.
- The saver’s credit income limit is $32,500 versus $65,000 on a joint return.
- The alternative minimum tax exemption amount is $56,700 versus $113,400 on a joint return.
Though it might appear that the odds are stacked in the favor of filing jointly, that isn’t always the case. Filing taxes is already complicated, and the above scenarios involve many unique variables that make it even more so.
The best way to determine whether filing jointly or separately will benefit you the most is to prepare separate returns for each spouse and one married filing jointly return. Then carefully evaluate and apply what works best for your financial situation. While this will involve a little more time and expense, it can mean thousands of dollars saved.
One way to save on tax preparation costs is to organize your financial records as though you’re going to file separately. It’s easier for your tax preparer to bring the data together after preparing the separate returns than it is to separate it.
If you’d like to learn more about what investment advisors do for their clients, please feel free to reach out to me at empirKalpartners.com for an individual assessment.
Wen Wen Wu and I have collaborated on this month’s article, but she did all the heavy lifting. She’s one of our firm’s most respected advisors. Wen Wen grew up in Taipei, Taiwan and came to the US for her education. She holds a BS Degree in Accounting from Utah State University and lives in Fresno, CA. In 2009, she passed the CFP® examination and completed her 3 years of work experience with Waddell & Reed and New York Life Insurance Company. Wen Wen specializes in investment management, retirement plans, tax planning and efficient tax strategies for wealth transfer. Edward Vela is an Investment Advisor and Estate Planning Specialist at empiriKal partners, llc ©, with 13 years of wealth management experience. He earned a Journalism Certification from the University of Massachusetts, a BA in Political Science, a Financial Planning Certification at UCLA, and an Executive MBA from the UCLA Anderson School of Management. You can contact Edward at 925-300-8805 or email edward@empiriKalpartners.com.
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