As a married couple, are we better off filing for taxes "jointly" or "separately"?
Only under very rare circumstances will filing your taxes as "Married filing separately" gives you a better tax result. There may be other non-income tax reasons (such as trying to avoid a deficiency liability of the other spouse) but these non-income tax reasons should be considered with an attorney.
Just because you file one way one year does not mean you must file the same way in the following year. The decision to file as "Married filing separately" or "Married filing jointly" can be made on a year-to-year basis.
What does "Married filing separately" mean?
In community property states (such as, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin) wages earned by each spouse are considered earned and reported one-half by each spouse.
In non-community property states wages are considered earned by the spouse working.
For example, assume you made $50,000 in wages and your spouse made $10,000 in wages. In community property states, if you filed as "Married filing separately," the wages for each of you are divided in half and allocated one-half to each spouse—$30,000 ($25,00 plus $5,000) is considered earned, and it's taxed to each of you.
However, if you're filing "Married filing separately" in a non-community property state, you would be taxed on $50,000 and your spouse would be taxed on $10,000.
No matter whether you're filing in a community property state or a non-community property state, joint sources of income, such as interest income and capital gains that are owned together by you and your spouse, and joint expenses, such as mortgage interest, property taxes and dependent care deductions that relate to jointly owned property, are considered made and reported one-half by each spouse.
In contrast, assume you have a separate bank account that has never been mixed up with jointly owned money. Interest earned in this separate account is taxed entirely to you if you're either in a community property state or in a non-community property state and you're filing "Married Filing Separately".
Also, perhaps you own the home (from before marriage or merely bought and paid for on your own). If you pay the mortgage and property taxes on that separate property, then all of the deductions will go directly to you, if you're either in a community property state or a non-community property state and you're filing "Married Filing Separately".
Note on the IRS
The IRS knows that strategies can be developed to take advantage of allocating income and/or deductions to one particular spouse, so the IRS has revised the income tax brackets for those filing as "Married filing separately" to make it less appealing.
Again, only under very rare circumstances will you find that filing "Married filing separately" gives you a better tax result. These rare circumstances generally involve one spouse having a disproportionate amount of "unreimbursed employee business expenses" or medical expenses. Under these circumstances it may be beneficial to file "Married filing separately," since limitations on these expenses are based on adjusted gross income. By virtue of reducing adjusted gross income to one person, deductions may increase for that person because limitations decrease.
We look forward to helping you with your financial questions.