NEW YORK (MainStreet) — The first choice taxpayers are faced with is selecting a filing status. If you are legally married on the last day of the year you generally must file as either Married Filing Jointly or Married Filing Separately, although in certain situations a legally married taxpayer may be able to file as Head of Household.

It is usually better for a married couple to file a joint return. Separate returns often result in the same or a greater combined tax liability. However, in some cases it is better to file separate returns.

Because of the Adjusted Gross Income (AGI) exclusions for medical expenses and miscellaneous deductions, if one spouse has excessive expenses in either category applying the percent exclusion to the lower separate AGI could result in bigger deductions for that spouse.

You must consider the resident and non-resident state tax consequences when deciding how to file. Usually you must use the same filing status on your state returns that you do on your federal return. If you file a joint federal return you generally must file a joint state returns as well. Filing separately may cost $150 more in federal income tax, but it could save $300 in state tax. I have found that this happens a lot on New Jersey state returns.

And you must also calculate the Alternative Minimum Tax (AMT) when comparing your filing options. You may pay less combined “regular” income tax by filing separately, but one or both spouses may end up a victim of AMT.

Here is something else to think about. Both spouses are separately and equally responsible for the accuracy and any tax due on a joint return. With separate returns each spouse is only responsible for the information and tax due on his/her individual separate return.

It is important to note that you will not be able to receive some tax benefits, or you will receive a reduced benefit, if you file separate federal income tax returns. For example -

  • you cannot claim the Credit for Child and Dependent Care Expenses, the Earned Income Credit, the American Opportunity Credit, or the Lifetime Learning Education Credit,
  • you cannot deduct student loan interest or tuition and fees,
  • deductible contributions to a traditional IRA may, and the ability to contribute to a Roth IRA will, be limited,
  • a greater amount of your Social Security benefits may be taxed,
  • one spouse’s capital loss cannot be used to reduce or wipe out the other spouse’s capital gains, and the maximum net capital loss deduction is limited to $1,500 for each spouse, and
  • you may not be able to deduct a loss on rental property.

If one spouse claims itemized deductions on a separate return, the other spouse must also itemize. One spouse cannot itemize and the other claim the standard deduction.

When filing separate returns, each spouse will report as income his or her wages and net earnings from self-employment, the income (interest, dividends, capital gains, rents) from separately-held assets (bank accounts, investments, rental property), and one-half of the income from jointly-held property.

There is an exception for married couples living in “community property” states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin). In such states each spouse usually must report one-half of the total “community income” (income from community property and wages for services of either spouse) unless the couple lived apart (i.e. maintained separate residences) for the entire year.

Each spouse can deduct only those expenses that he/she has actually paid, and for which he/she is legally responsible. Expenses paid from separate funds (i.e. the wife’s separate checking account) are considered to be paid by that spouse, while expenses paid from joint funds (a joint checking account) are considered to be paid equally by each spouse unless they can prove otherwise.

If the wife makes a $500.00 charitable contribution from her separate checking account, she can claim the entire $500.00. The couple makes monthly contributions of $100.00 to their church from a joint checking account, each spouse can deduct $600.00.

Medical expenses are deducted by the spouse that makes the payment, regardless of which family member incurred the medical costs. A wife can deduct medical bills for her husband that she paid from her separate checking account, even if she is not legally responsible to do so.

If real estate is owned by only one spouse (vacation property owned by the wife), only that spouse can deduct the related property taxes, and only if that spouse has actually paid the taxes. Property tax paid on jointly-owned real estate is deducted under the guidelines discussed above.

Mortgage interest is only deductible by a person who is legally liable for that mortgage. For a debt on jointly-held property, where both names are on the loan, each spouse can deduct the amount of interest that he or she has actually paid, using the guidelines discussed above. In the case of more than one jointly-held property (personal residence and vacation property), each spouse can deduct the mortgage interest on one home, unless both spouses agree (in writing) that one spouse will deduct the interest on both properties.

When it comes to claiming dependent children, either spouse can claim a child as long as they both agree. A couple with three children can decide that the husband will claim one child and the wife two, or that the wife will claim all three. The decision should be based on which spouse will benefit most from the exemptions. While one would think the spouse with the higher income should claim all the children, this is not always the case. A lower income spouse may be entitled to a larger Child Tax Credit. And there may be AMT complications, as dependent exemptions are not allowed under AMT.

So should you file joint or separate? The answer is “it depends.”

--Written by Robert Flach for MainStreet

Robert Flach has more than 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.