When it comes to filing taxes, married couples face an important decision: should they file jointly or separately?
Understanding the differences between these two primary filing statuses could potentially have significant implications for your tax liability and overall financial strategy.
For high-net-worth individuals, particularly those approaching or in retirement, the choice between married filing jointly vs separately could potentially impact various aspects of your financial plan, including tax efficiency, asset protection, and estate planning.
As experienced financial advisors, we at Riverbend Wealth Management aim to provide you with the information you need to make informed decisions about your finances. In this comprehensive guide, we’ll explore the nuances of married filing jointly vs separately, helping you understand which option may be more advantageous for your unique financial situation.
When the vows have been made and the honeymoon is over, married couples’ minds may be far from thinking about taxes. But with the Tax Cuts and Jobs Act (TCJA) passed in December 2017, there are some important considerations to make regarding your future taxes and filing status as newlyweds. We’ll discuss the tax pros and cons of getting married, and how your filing status can affect your tax bill.
Overview of Filing Statuses
Before delving into the pros and cons of each filing status, it’s important to understand what these terms mean and who is eligible to use them.
Married Filing Jointly
When a married couple chooses to file jointly, they combine their income, deductions, and credits into a single tax return. This is the most common filing status for married couples, as it often results in a lower overall tax liability.
Eligibility:
- You must be legally married as of the last day of the tax year (December 31).
- Both spouses must agree to file a joint return.
- Same-sex married couples are eligible to file jointly at the federal level.
Married Filing Separately
With this status, each spouse files their own individual tax return, reporting only their personal income, deductions, and credits.
Eligibility:
- You must be legally married as of the last day of the tax year.
- One spouse may choose this status even if the other spouse decides to file jointly.
It’s worth noting that if you’re legally separated or divorced as of December 31, you’re considered unmarried for the entire year and must file as single or head of household.
6 Advantages of Filing Jointly
For many married couples, especially those with high net worth, filing jointly could potentially offer several advantages:
1. Lower Tax Rates and Higher Income Thresholds
When filing jointly, couples could potentially benefit from lower tax rates and higher income thresholds for each tax bracket. This means you might pay a lower percentage of your income in taxes compared to filing separately.
For example, in 2024, the 24% tax bracket for married couples filing jointly applies to taxable income between $199,050 and $372,950.
For those filing separately, the 24% bracket applies to income between $99,525 and $186,475. This difference could potentially result in significant tax savings for high-income couples.
2. Reduction of the “Marriage Penalty”
The TCJA has reduced the widespread effects of the “marriage penalty” on couples, although it has not been eliminated completely. The “marriage penalty” is a phrase that’s commonly been used to describe the scenario in which married couples end up having to pay more in taxes than if they filed as two singles.
Before the TCJA, more couples were prone to the “marriage penalty,” namely due to the tax bracket structure. For example, if two individuals with an income of $95,000 filed separately, they may land in the 25-percent tax bracket. But should they get married and file jointly with a combined income of $190,000, they would exceed the 25-percent tax bracket for married couples and be pushed into a higher bracket.
With the new tax bracket adjustments bringing relief to most married couples, the existence of a “marriage penalty” still is due largely in part to the deductions and tax credits that some may be eligible for as individuals, but not when filing jointly.
3. Tax Bracket Ranges Are Exactly Double… Up to a Point
The TCJA has adjusted the tax bracket ranges to reduce the “marriage penalty.” This means that spouses earning a combined total of $400,000 or less are in the same tax bracket as they would be if they were filing separately, say as two individuals earning $200,000 a year. Each tax bracket, up through the 32-percent bracket, exactly doubles the limit from filing individually to filing jointly.
However, this doubling effect stops at the 35- and 37-percent tax brackets:
The 35-percent bracket is:
- $231,251 to $578,125 for single filers
- $400,000 to $600,000 for joint filers
The 37-percent bracket is:
- Over $578,125 for single filers
- Over $693,750 for joint filers
Of course, $693,750 isn’t even close to double $578,125, meaning high-earning married couples could be facing the “marriage penalty” by filing together.
4. Access to Valuable Tax Credits and Deductions
Many tax credits are either unavailable or reduced for couples who file separately. By filing jointly, you may be eligible for:
- Earned Income Tax Credit
- Child and Dependent Care Tax Credit
- Adoption Credit
- American Opportunity and Lifetime Learning Education Tax Credits
- Premium Tax Credit (for health insurance purchased through the Marketplace)
- College tuition expenses deductions
- Student loan interest deductions
For high-net-worth individuals, some of these credits might be less relevant due to income limitations. However, they could still be beneficial in certain situations, such as for business owners with fluctuating income or those planning for multigenerational wealth transfer.
5. Higher Standard Deduction
With the TCJA raising the standard deduction rate for those filing jointly from $13,000 to $24,000, some couples may find that the need for itemizing their deductions is no longer necessary, even though it may have been in previous tax years.
6. Simplified Tax Preparation Process
Filing jointly typically simplifies the tax preparation process. You’ll only need to prepare and file one tax return instead of two, which could save time and potentially reduce the cost if you’re working with a tax professional.
5 Situations When Filing Separately May Be Beneficial
While filing jointly is often advantageous, there are scenarios where filing separately might be the better choice, especially for high-net-worth individuals:
1. One Spouse Has Significant Itemized Deductions
If one spouse has substantial itemized deductions that are limited by adjusted gross income (AGI), filing separately might allow that spouse to claim more of these deductions. This could potentially include:
- Medical expenses (which must exceed 7.5% of AGI to be deductible)
- Casualty losses
- Miscellaneous itemized deductions (for tax years when they’re allowed)
2. Protection from Joint Liability
When you file jointly, both spouses are jointly and severally liable for the tax and any interest or penalties due on the return. This means the IRS can come after either spouse for the entire amount owed, even if only one spouse earned the income.
Filing separately could protect one spouse from being held responsible for the other’s tax liabilities. This could be particularly important for high-net-worth individuals with complex financial situations or business owners with potential tax issues.
3. Income-Based Student Loan Payments
If one spouse has income-based student loan payments, filing separately might result in lower monthly payments. This is because the payments are typically calculated based on the individual’s income rather than the couple’s combined income when filing separately.
4. Separation or Pending Divorce
If you’re separated or in the process of divorcing, filing separately might be preferable to avoid potential conflicts or complications with your soon-to-be ex-spouse.
5. One Spouse Has Past-Due Debts
If one spouse has past-due federal or state taxes, student loans, or child support payments, filing separately could prevent the other spouse’s tax refund from being seized to pay these debts.
Common Misconceptions and Pitfalls
When deciding between married filing jointly vs separately, it’s crucial to be aware of common misconceptions and potential pitfalls:
Misconception: Filing Separately Always Leads to a Lower Tax Bill
Many people assume that filing separately will result in a lower overall tax bill. However, this is often not the case due to the loss of certain tax benefits and credits available only to joint filers.
Misconception: You Can Choose the Most Beneficial Status After Calculating Taxes Both Ways
While it’s a good idea to calculate your taxes both ways to see which is more beneficial, you can’t simply choose the status that results in the lower tax bill. Your choice of filing status affects your eligibility for certain deductions and credits, so you must use the same status consistently throughout your return.
Pitfall: Impact on State Taxes
The decision to file jointly or separately at the federal level may affect your state tax situation. Some states require you to use the same filing status on your state return as you do on your federal return. Others allow you to choose a different status. It’s important to consider both federal and state tax implications when making your decision.
Pitfall: Loss of Tax Credits
As mentioned earlier, filing separately may result in the loss of several valuable tax credits. This includes the Earned Income Tax Credit, which can be particularly beneficial for business owners with fluctuating income.
Pitfall: Limitations on IRA Contributions
If you file separately and lived with your spouse at any time during the year, you cannot claim a deduction for contributions to a traditional IRA if your modified AGI is $10,000 or more. This could potentially impact your retirement saving strategy.
Pitfall: Social Security Taxation
When filing separately, you may have to include more of your Social Security benefits as taxable income. This could be a significant consideration for retirees.
Pitfall: Joint Liability When Filing Together
When you and your spouse file jointly, both parties are legally liable and responsible for any tax owed, penalties or interest. This includes couples who filed jointly and later divorced as well as couples in which one spouse earns all the income. If you are worried your spouse may be attempting to evade taxes or claim less than they should, it’s important to understand that you could be held responsible or liable if you filed jointly.
Key Considerations Before Deciding
Before making a decision on married filing jointly vs separately, consider the following factors:
- Income Disparity: If there’s a significant difference in income between spouses, filing jointly might result in a lower overall tax bill due to the “marriage bonus” in the tax code.
- Itemized Deductions: Calculate whether your itemized deductions would exceed the standard deduction when filing jointly vs separately. Remember that if one spouse itemizes, the other must as well when filing separately.
- Potential Tax Savings: Use tax preparation software or consult with a tax professional to calculate your tax liability under both scenarios. This will give you a clear picture of the potential savings (or costs) of each option.
- Asset Protection Concerns: For high-net-worth individuals, asset protection might be a significant concern. Filing separately could provide some protection against joint liability for taxes.
- Estate Planning Implications: Your choice of filing status could potentially impact your estate planning strategy, especially if you’re using strategies that rely on transferring assets between spouses.
- Business Ownership Considerations: If you’re a business owner, consider how your choice of filing status might affect your business tax situation, especially if your spouse is involved in the business.
- Future Financial Goals: Consider your long-term financial goals. Will filing jointly or separately better support your objectives for retirement, wealth transfer, or charitable giving?
Making Your Decision: Next Steps for Deciding Your Filing Status
The decision between married filing jointly vs separately is not always straightforward, especially for high-net-worth individuals with complex financial situations. While filing jointly is often beneficial due to lower tax rates and access to certain credits, there are scenarios where filing separately could be advantageous.
Key takeaways to remember:
- Filing jointly often results in a lower overall tax liability, but not always.
- The TCJA has reduced the “marriage penalty” for many couples, but it still exists in some situations.
- Filing separately might be beneficial in cases of significant itemized deductions, income-based student loan payments, or to protect against joint liability.
- The choice between married filing jointly vs separately can affect various aspects of your financial strategy, including retirement planning, estate planning, and asset protection.
- It’s crucial to consider both federal and state tax implications when making your decision.
- Calculate your taxes both ways before making a decision, but be aware that your choice affects your eligibility for certain deductions and credits.
- At Riverbend Wealth Management, we understand that tax planning is a crucial component of a comprehensive financial strategy. As experienced advisors, we could potentially help you navigate these complex decisions, taking into account your unique financial situation, goals, and risk tolerance.
At Riverbend Wealth Management, we understand that tax planning is a crucial component of a comprehensive financial strategy. As fiduciaries, we could potentially help you navigate these complex decisions, taking into account your unique financial situation, goals, and risk tolerance. If you’re interested in learning more, schedule a no-obligation 15-minute financial assessment with our team.
We encourage you to consult with a tax professional or financial advisor before making a decision about your filing status. They can help you run the numbers and consider all relevant factors to make the most informed decision possible.
Remember, the right choice between married filing jointly vs separately depends on your specific circumstances and may change from year to year as your financial situation evolves. Regular review and adjustment of your tax strategy could potentially help you work towards your long-term financial goals while aiming to minimize your tax liability.
You’ve likely heard that getting married can mean big tax breaks in your future, but the truth is it’s important to do your math and research carefully before filing. This can help you and your spouse understand all of the latest tax law’s pros and cons to filing jointly or separately. And if you’re still unsure or have recently tied the knot, it may not be a bad idea to check in with your CPA or financial planner to thoroughly evaluate all of your options.
Content in this material is intended for general information purposes only and should not be construed as specific investment advice or recommendations for any individual. Please contact your advisor with any questions or specific recommendations regarding your own circumstances. Asset allocation does not ensure a profit or protect against a loss. Investing involves risks, including possible loss of principal.
