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One of the first major financial challenges that married couples face is their first time filing taxes together. Even if you are used to managing your own finances and tax reporting, adding another person to the equation can leave you facing a number of difficult decisions. How do you file taxes when married? Should you file taxes joint or separate? There are many benefits to filing taxes jointly, but there also benefits to filing taxes separately even though you’re married.
Should we file taxes separately even though we’re married?
Many couples find that filing separately allows them to maximize certain deductions. Separate tax returns also protect spouses from each other’s past filing errors or outstanding debts. If one spouse has outstanding debt to the government – for example, through unpaid taxes or a student loan – the IRS can seize part of your tax refund to pay it off. If you file separately, the second tax return will be protected.
Benefits of filing taxes separately:
• If you are a small business owner and a lot of your personal assets are tied up in your business, filing separately creates a division between your business and your spouse’s income.
• Medical bills can only be claimed if they exceed 7.5% of your income, so a divided income will make these easier to deduct.
• If anything fraudulent is found on a tax return, each person who signed it is liable. Filing separately protects you from legal penalties or prosecution associated with your spouse’s return.
• To claim many employee deductions, like job search expenses or mileage, they must exceed 2% of your income. Like medical deductions, these are easier to claim with a smaller income.
Married and filing taxes jointly
Many couples decide to file jointly simply because it is easier to prepare only one tax return. However, a joint filing status can also have financial benefits. If you are eligible for family-related deductions, or if all your debt and accounts are held in common, this may be the best choice for you.
Benefits of filing taxes jointly:
• Filing jointly allows you to maximize child-and-family related deductions more effectively than separate returns. These deductions include the child tax credit and the Earned Income Tax Credit.
• The maximum value of tax-deductible IRA contributions you can make is based on a percentage of your income. Filing jointly reports your family’s gross income, so it raises the maximum limit on these contributions.
• Education costs can more easily be deducted from a joint return, especially if only one spouse is working while the other is in school. These include the American Opportunity Credit (for college tuition costs) and interest paid on student loans.
Whichever filing method you pick, remember, the choice is not a reflection on the strength or health of your marriage. Deciding how to file your taxes is a financial concern, and it is important to consider a number of factors when deciding which is best for you and your spouse. If you are unsure whether to file jointly or separately, let us help you. Contact us now.
Source: http://bit.ly/1ftzdAE, Katharine Paljug on February 11, 2013