If my wife and I file as married filing separately, how do we handle capital gains?
-- Charlie Hogg
Even if you select "married filing separately" as your filing status on your
-- U.S. Individual Income Tax Return
, you are required to include your spouse's Social Security number. This way, the
Internal Revenue Service
can cross-check your return with your spouse's to make sure your income and deductions are split up properly.
Most likely, your broker will send you a
-- Proceeds from Broker and Barter Exchange Transactions
detailing your capital gains for the tax year. If the form contains both your names, each of you should report half the gross proceeds on your respective
- Capital Gains
forms. Again, the IRS most likely will cross-check the returns to make sure the numbers add up.
To be safe and to make things easier for the IRS, you can attach a statement noting that half is reported on your return and the remainder is on your spouse's return, says Maggie Doedtman, a senior tax-research and training specialist at
in Kansas City. Be sure to include her Social Security number on your attachment.
But if the Form 1099B is in only your name, you'll have a bit more paperwork to do. First, include the whole amount on your Schedule D. On the line below that amount, subtract the amount attributable to your wife and write, "Amount received as nominee for
your wife's name,
your wife's Social Security number."
Your wife can report her portion of the total on her Schedule D and note, in the same format as above, that an additional amount will be reported on your tax return. She can include a copy of the original Form 1099B, although it is not necessary. The IRS will not be too concerned that she reported extra taxable income without documentation. The IRS likes that kind of thing.
In this instance, the IRS will be concerned about your return because you are including a Form 1099B that is in your name, but you're not paying tax on the full amount. So it's important to make very clear on Schedule D that you are sharing the amount with your wife.
Here's a big note: If you file married filing separately, your capital-loss deduction limitation is $1500 (instead of $3000 if you file a joint return). In other words, your losses are limited to the amount of your capital gains, plus $1500 a year. But you may carry any excess losses forward for an unlimited time until they're used up.
Some income limitations are cut in half, too, when you're married filing separately. For example, the adjusted gross income limit on the child tax credit ($500 per kid) for 1999 drops to $55,000, half of the $110,000 limit for couples who file jointly. So once your adjusted gross income exceeds $55,000, the amount of your credit begins to decrease until it eventually reaches zero. (See this previous
Tax Forum for more on this credit.) Same goes for income limits on your itemized deductions and personal exemptions. Those are all cut in half too.
But at least you still get half. There are other tax perks that you flat-out lose when you elect to file as married filing separately:
- You cannot convert a traditional IRA to a Roth IRA during a year for which you file a separate return. And if you already have a Roth IRA established, your can no longer contribute once your adjusted gross income hits $10,000 (and no, that's not a typo).
If your spouse itemizes deductions, your standard deduction becomes zero. So you must itemize as well.
You can't deduct the interest paid on your student loan.
You can't take the credit for child and dependent care expenses unless you're legally separated from your spouse.
You can't take the earned income credit, a tax credit for people who work and have earned income under $30,580 for 1999, according to the
Ernst & Young Tax Guide.
You cannot exclude interest income from qualified U.S. savings bonds that you used for higher education expenses.
You cannot take
education credits. That means no Hope or Lifetime Learning credits.
You cannot take the exclusion or credit for adoption expenses in most instances.
So why bother, you may ask? Well, there may be some circumstances where it makes sense. For instance, you should consider filing separately if:
- You suspect your spouse owes the IRS money.
Your spouse has big medical deductions. Since you only can deduct out-of-pocket medical expenses that exceed 7.5% of your adjusted gross income, your spouse may be better off if she can report a lower AGI.
If both you and your spouse have very similar incomes and you don't normally take the deductions excluded above.
Try preparing your return both ways -- separately and jointly -- to make sure you're getting the most advantageous tax treatment.
Be sure to check out
-- Your Federal Income Tax
for more married-filing-separately information.
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TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.