Tax Lawyer Blog

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Filing Your Own Return

Married Tax Filing Status

Should We File a Joint Return or Married Filing Separately?

In our last post, we reviewed the main advantages and disadvantages of joint tax returns for married couples. This post will focus on when a married couple should consider filing separately, and special considerations if they reside in a community property state.

When to consider filing separately

Following are the main reasons that married individuals file separately:

  • High income. Where both spouses have high earnings, their combined income may place them in a higher tax bracket.
  • Debts. If a spouse owes back taxes, must pay child support, or has overdue student loans, filing a joint tax return could result in the IRS offsetting the other spouse’s tax refund to pay the debt.
  • Marriage problems. If a couple is going through a divorce, contemplating one, and/or one spouse is concerned about the other not reporting all of their income, they might wish to avoid liability for their spouse’s tax reporting and file their own return.
  • Income-based student loan repayment. Where one or both of the spouses is on an income-based student loan repayment schedule, the couple should have their accountant do some calculations for them. If the tax savings for filing jointly does not exceed the higher loan payments that will result from reporting their combined income, they should consider filing separately (but understand that lower payments will extend the period of the loan).
  • Itemized deductions. Sometimes filing separately is beneficial if one or both of the spouses has a lot of itemized deductions subject to an adjusted gross income (AGI) “floor,” such as medical expenses (where the deduction is limited to 7.5% of a taxpayer’s AGI) and employee business expenses (where the deduction is limited to 2% of the AGI).

Filing separately in a community property state

For married couples and registered domestic partners who file separately and reside in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), each partner must report their separate income and half of the community income on their respective tax returns.

When filing separately, married couples should be certain to have an agreement regarding how they will calculate the reporting of their income and related expenses, and whether they will be itemizing expenses or utilizing the standard deduction. A Form 8958 must be attached to each Form 1040, which provides the IRS with an itemized list of how the allocation of each spouse’s wages, interest, dividends, capital gains and losses, deductions, and credits was made.

One or the other spouse may claim the exemption for each dependent child or children, but they may not each claim half of an exemption for a single person. For more on this topic, see IRS Publication 555.

Changing your filing status

When you file a joint return, you cannot switch to a separate return after the filing due date. If you file separate returns, however – as a single, head of household, or as married filing separately, you can usually change to a joint return at any time within three years of the filing due date (not including extensions).

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Bush-Era Tax Cuts Expiring Soon

Senior Partner of the Law Offices of Stephen Moskowitz, LLP

The Bush Tax cuts will expire if Congress does not act by the end of this year.  Their expiration would have an across-the-board impact that would be felt by many Americans.  Perhaps the best way to prepare for the impact of their potential expiration is by understanding exactly what the Bush tax cuts are.

 Two major tax-cutting bills - the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 and the Jobs Growth Relief Reconciliation Act of 2003 - make up the Bush tax cuts.  Together, these laws lowered the income tax rates, cut capital gains and dividends, addressed the so-called marriage penalty, phased out and eventually eliminated itemized deductions and personal exemptions for higher income earners, doubled the child tax credit and phased-out and eventually repealed the estate tax.  Each of these areas are discussed further below.

Income Tax Rates
Thanks to EGTRRA, the current income tax brackets are 10%, 15%, 25%, 28%, 33% and 35%.  Should the Bush tax cuts be allowed to expire, the 10% tax bracket would disappear and taxable income below $34,550 annually would jump up to the 15% bracket.  Everyone else would pay either 28%, 31%, 36% or 39.6% in annual income tax. 

Capital Gains and Dividends
The Bush tax cuts created a 15% ceiling on the rate of long-term capital gains and qualified dividends.  If allowed to expire, that ceiling for long-term capital gains would move up to 20% while the rate for qualified dividends would soar to 39.6%. 

Marriage Penalty
The marriage penalty is a tax liability that occurs when one or both people in a marriage pay more in taxes due to combining their earnings than they would had they stayed single.  For example, suppose a wife and husband both make $30,000 annually prior to marriage.  When they marry and file jointly, they report $60,000 which carries a higher overall tax liability for both of them.  The marriage penalty can also hurt married couples in scenarios where combining salaries pushes one or both of them into a higher bracket.  
 
Thanks to the 2003 portion of the Bush tax cuts, married couples filing jointly are entitled to deduct double the amount a single filer is entitled to deduct.  If the Bush tax cuts are left to expire, married couples would not be entitled to this deduction and would thus pay more in taxes than they did before they were married. 

Itemized Deductions and Personal Exemptions

The Bush tax cuts also allows higher-income earners to keep more of their money in the form of deductions and exemptions.  If the cuts expire, people with adjusted gross incomes above $170,000 who take itemized deductions will be hit hard come January 1, 2011.  This is because about 80% of the itemized deductions for people in this income level (for things like mortgage interest, state and local taxes, and charitable donations) would go away.  Additionally, higher-income earners would say goodbye to their personal exemption deductions.

Child Tax Credit
The Bush tax cuts doubled the child tax credit from $500 to $1,000 per child.  This deduction would return to $500 per tax year if Congress does nothing. 

Estate Tax
Part of the Bush tax cuts included a gradual decrease in the estate tax over time and a complete repeal of that tax in 2010.  However, the estate tax is scheduled to come back with a vengeance in 2011.  As of January 1, 2011 estates valued under $1 million would remain exempt but estates valued over $1 million would be hit with rates that top out at 55%. 

Clearly the expiration of the “tax cut” as set forth EGTRRA of 2001 and the Jobs Growth Relief Reconciliation Act of 2003, will have a financial impact on most individual taxpayers.   Please contact our firm if you would like to discuss your tax planning going forward.   The Law Offices of Stephen Moskowitz, LLP has over thirty years of broad-based tax experience.   We represent many individuals and businesses from many industries, including but not limited to, real estate management, construction, professional service firms, medical practices, manufacturing, retail, technology development, etc.   We provide comprehensive tax litigation, planning, and defense representation.   I invite you to contact our firm to discuss your legal questions.   Please feel free to use our contact form or phone us at (415) 394-7200.