Married Filing Separately As an
Option
It is nearly always a very bad idea
for married taxpayers to file separate returns. However, if both
spouses have similar income levels but one spouse has a much higher
amount of deductible expenses, it may
be advantageous to file separately. This would also be the case if
a lower-earning spouse has a high amount of deductible expenses.
For
example, medical expenses are deductible
only to the extent that they exceed 10 percent (7.5 percent if the
taxpayer or spouse is over age 65) of the taxpayer's adjusted gross
income (AGI). If one spouse has the majority of the family medical
expenses, the 10 percent threshold may be easy to overcome when only
that spouse's income is counted. A similar situation exists for miscellaneous itemized deductions, including
employee business expenses (2 percent of AGI threshold) and nonbusiness casualty losses (10 percent of AGI threshold).
However,
keep in mind that if one spouse itemizes deductions, the other will
have to itemize as well! The other spouse can not claim a standard
deduction. This could mean that the second spouse winds up with few
or no allowable deductions. Therefore, the difference must exceed
the lost standard deduction for this strategy to make sense.
Another
wrinkle to consider is that taxpayers whose adjusted gross income
(AGI) exceeds a threshold amount must reduce the amount of allowable
itemized deductions by the lesser of: (1) three percent of the excess
over the threshold amount, adjusted annually for inflation; or (2)
80 percent of allowable deductions. No reduction is required in the
case of deductions for medical expenses, investment interest, and
casualty, theft or wagering losses.
If you're a high-income
taxpayer, it may also be important to consider how separate filing
alters the impact of the phase-out on exemptions. If you have dependents
and file separately, you may divide their exemptions between yourself
and your spouse, but no single exemption can be split.
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Save Money If you have numerous dependents and
one spouse claims them all, you might come out ahead. Just make sure
that the spouse who claims the exemptions can meet all the tests for claiming each dependent ; generally
this would require that the spouse claiming the exemptions earned
enough money to provide more than one-half of the dependents' support. |
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