Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

The Joint Tax Return

Married Tax Filing Status

Should We File a Joint Return or Married Filing Separately?

IRS data indicates that over 95% of married couples file jointly – and for most, but not all, couples this makes good economic sense. In this two-part series, we will discuss the advantages and disadvantages of filing joint and separate tax returns and how filing separately works for people who live in community property states.

Note that for federal tax purposes, the same rules apply for same-sex marriages, but not to individuals in a civil union, registered domestic partnership, or another relationship that isn't “marriage” under state law. The basics When a couple files a joint tax return, they combine their income, deductions and exemptions on a single Form 1040, and they either receive a refund in both their names or incur a tax debt for which both are liable. If they file separately, they each have their own tax return which includes only their own income – any joint interest, dividends and capital gains are divided between them and allocated to their respective returns. Any tax debt and liability is attributed to the individual, not to both of them.

Advantages of filing a joint return

The reason why so many married couples file a joint return is that for most everyone who is not in a very high income bracket the tax rate is lower when filing jointly, particularly if there is a significant discrepancy between the spouses’ respective earnings. The standard deduction is also slightly higher.

In addition, married taxpayers who file jointly can take advantage of a number of itemized deductions and tax credits that are only allowed (or more fully allowed) for joint filers, such as:

  • The Earned Income Tax Credit (EITC)
  • Education tax credits (American Opportunity Credit and Lifetime Learning Credit)
  • Deduction for net capital losses
  • Child and dependent care credit
  • Adoption Tax Credit
  • Deduction for college tuition expenses
  • Deduction for student loan interest payments

A few disadvantages to consider

Taxpayers in high income brackets and those with a lot of itemized deductions (including medical expenses) should do a comparison with the numbers for married filing separately, to see which result provides a better outcome. Taxpayers with student loans have something else to consider – since student loan payments are calculated on the basis of the previous year’s tax returns, if a joint return is filed the following year’s monthly loan payment will be based on the income of two people rather than one and is likely to be significantly higher.

The main concern for some taxpayers is that married couples who file a joint return have “joint and severable liability” for any tax due. What this means is that both spouses are equally responsible for the taxes owed, and may be audited and/or prosecuted for tax fraud committed by either party. The IRS does not care which spouse incurred the debt, it will pursue both – one of the spouses could be responsible for the entire tax debt even if the other spouse earned all of the income! Although “innocent spouse” and other forms of relief are available, the taxpayer has the burden of proving that they are qualified for it.

Changing your filing status

Finally, keep in mind that after the due date for the filing of your tax return, you cannot switch from married filing jointly to married filing separate.

In our next post, we will discuss married filing separately in more detail, and special considerations in Community Property states.  

The Duty of Impartiality and Other Trustee Troubles

Trustees are accountable to both the current income beneficiaries and the remaindermen of a trust, and are often placed in the unenviable position of have to balance the interests of the two. A beneficiary may look forward to inheriting a business, their childhood home, a treasured family heirloom, or a large investment portfolio, and some level of conflict with the person holding the purse strings should be expected — or at least anticipated.

A trustee must be impartial

A significant challenge of prudent investing is in the selection or retention of investments that may provide a greater benefit to either the current income beneficiaries or to the remaindermen. For example, if an investment produces significant income but is otherwise losing value, the remaindermen may have a cause of action against the trustee for failure to exchange the property or withhold income for their benefit. The reverse is also true - if an investment produces little or no income but has appreciated considerably, the trustee will be faced with having to consider exchanging the property and/or allocating some of the sale proceeds to the income beneficiaries.

Trustee troubles

The relationship between trustees and beneficiaries is like that of step-parent and child. The trustee is typically selected by the parent, and the children have little or no recourse to extract themselves from an arrangement that does not suit them personally. Trustees must therefore be especially careful to maintain meticulous records and follow the guidelines and rules set forth by the trustor and The Uniform Prudent Investor Act (UPIA).

When a beneficiary sues a trustee, the challenge is usually made for one or more of the following reasons:

  • The trustee did not properly safeguard the assets in the trust
  • The trustee managed the trust in a way that disproportionately benefitted certain beneficiaries and not others, and/or
  • The trustee used the trust funds to pay their own personal expenses, or to support someone else who is not a named beneficiary of the trust.

Even the most diligent and prudent trustees may face troubles that have nothing to do with their actions. Anticipated inheritances can bring out the worst in people, and trustees are often caught in the midst of squabbling relatives despite their best efforts. This role is not for the faint-hearted.

San Francisco estate planning attorneys

The attorneys and accountants at Moskowitz, LLP work with individual and corporate trustees, as well as private professional fiduciaries. If you are seeking legal counsel to draft your estate plan, or are a trustee seeking assistance with the administration of an estate, contact our San Francisco office for a consultation.