Getting married to your significant other can come with a variety of financial benefits. Married couples are entitled to 50% of their partner’s Social Security retirement benefits, have a higher ceiling for annual IRA contributions, and get better health, auto, and home insurance rates.
One of the largest benefits to marriage comes in the form of tax returns. It’s possible that filing jointly with your spouse can result in a lower tax rate than if you filed separately.
However, filing jointly would mean that both parties are now responsible for any potential issues. So if your spouse owes any back taxes, that means that you could now be on the hook for them.
If you are concerned about the filing history of your spouse, you should talk with a tax professional. They can review their filing history (if they have one) and advise on whether you should advise jointly or separately.
What Does It Mean To File Jointly?
Getting married is a huge milestone that will have a profoundly significant effect on your life. One of the largest changes is that you will now have the option of filing your taxes jointly. Using the “married filing jointly” option will mean that you and your spouse will pool your financial information and file a single return.
Filing jointly will typically come with the largest tax breaks for a taxpayer. For example, married couples are taxed 10% on their first $19,750 taxable income. If they were to file separately, they would only receive a 10% tax rate on their first $9,875.
Another large benefit of filing jointly is that the standard deduction will increase. The standard deduction in 2021 for taxpayers filing their returns individually is $12,550. The deduction will increase to $12,950 in 2022. The standard deduction for married couples filing jointly is $25,100 in 2021 and will increase to $25,900 in 2022.
In addition to these benefits, filing jointly means that you can be eligible for several tax credits, including:
- The Earned Income Tax Credit applies to taxpayers that have a modest amount of income. Individual taxpayers are eligible to receive this tax credit too, but not if they are married. In order to qualify for this credit, you must either be single or married and file jointly.
- The American Opportunity and Lifetime Learning Education Tax Credit lower the tax obligation of anyone attending college. This credit is available when filing jointly for anyone with a spouse or child paying tuition for college or graduate school courses.
- The Child and Dependent Care Tax Credit can help offset child care costs or costs for a disabled dependent. A taxpayer must be employed and pay for caregivers to look after a disabled spouse or child under 13 to be eligible for this credit.
When Should You File Separately?
If you’re eligible to do so, then It’s almost always better to file your taxes jointly. Several benefits only apply to a married couple. However, a few times, filing jointly can end up costing you.
These are a few situations when it might be better to file your taxes separately from your spouse:
One of You Has a Lot of Student Loan Debt
Student loan debt isn’t like most other forms of debt. Filing for bankruptcy will not remove student loan debt, so they will follow you until they are repaid. If you or your spouse owes a lot in student loans, then it might be a good idea to file separately.
Defaulting on student loans means that no payments have been made in 270 days or longer. In the event of defaulted student loans, the IRS has the option of legally seizing any tax refunds. They will apply the entire amount to the loan debt, and you will receive nothing.
One of You Accrued Expensive Medical Bills
Even with incredible insurance benefits, it doesn’t take long to rack up expensive medical bills. Fortunately, the IRS allows taxpayers to deduct medical expenses after reaching a certain threshold.
You can deduct medical care expenses from your tax obligation if they are greater than 7.5% of your annual adjusted gross income (AGI). Filing jointly will mean that the income of you and your spouse will be added together.
You will still be eligible to deduct medical expenses over 7.5% of your AGI, but pooling your incomes will increase the AGI on your return. By filing separately, you will reach this threshold much sooner and be able to deduct more money from your tax payment.
You Could Make More Money Filing Separately
There are tons of benefits from filing jointly, but there can also be some downsides. Filing jointly can be very beneficial for a married couple if one person makes much more than the other. Adding the two incomes together would probably not elevate your income levels into a higher tax bracket.
However, if you and your spouse make about the same, it’s much more likely to bump you into a higher bracket. If that were to happen, you would be taxed at a higher rate and have a bigger tax obligation.
Before you file your return, you should hire a tax professional to review your finances. They can prepare your tax returns separately and then jointly. You can compare the tax returns and then decide which option will net you more money.
Who Is Required To File a Tax Return?
Every American citizen must file an annual tax return if they meet the federal requirements. You must file a tax return if you have a gross income higher than the standard deduction:
- A single taxpayer under the age of 65 is $12,550.
- A single taxpayer over the age of 65 is $14,250.
- A married filing with both spouses under 65 is $25,100.
- A married filing with only one spouse under 65 is $26,450.
- A married filing with both spouses over 65 is $27,800.
- A head of household taxpayer under the age of 65 is $18,800.
- A head of household taxpayer over the age of 65 is $20,500.
The standard deduction increases periodically due to inflation. These requirements are for the 2021 tax year, but they would have been lower in the past. Anyone that meets the criteria listed above is legally required to file a tax return. Failure to do so can result in severe penalties.
The most common penalty is that late fees and interest will be tacked onto the overall tax debt. The IRS will charge a failure-to-pay penalty of 0.5% of the tax debt for every month that it is delinquent. These charges will continue until the maximum penalty of 25% is reached. The 0.5% rate will increase to 1% if the IRS has issued a notice of intent to levy. The IRS will also assess interest for unpaid taxes depending on the federal short term rate plus 3% which compounds daily.
On top of these charges, there will also be a late fee tacked on. The late filing penalty is usually 5% of the tax owed for each month that the return is late. The late fee penalty also has a maximum cap of 25%.
What Happens If Your Spouse Hasn’t Filed Taxes in a While?
Failing to file a tax return is a very serious offense. First, you should convince your spouse to file their missed returns and pay off their tax obligation. That will prevent your spouse from accruing more financial penalties or possibly being charged with tax evasion.
You should not file jointly until your spouse is current with their tax returns and back taxes. The IRS will usually file a substitute return for individuals that miss the filing deadline and fail to file tax returns. They won’t apply any credits, deductions, or exemptions to the substitute return, meaning the tax obligation will be much higher than normal.
Filing a joint return will mean that you will now be responsible for any taxes owed, as well as financial penalties. The IRS can legally seize any refund you might be owed and apply it to outstanding debts.
If you haven’t learned about your spouse’s tax problems, then you might be eligible for some relief. The IRS Form 8379, or “Injured Spouse Allocation,” might be able to save your refund if they applied all or part of it to your spouse’s debt. It’s a little bit of a long shot, but it might be worth trying instead of losing out on your refund.
Marriage comes with many ups and downs in nearly every aspect of life. These down can especially be severe for tax purposes if your spouse owes a lot of back taxes. It will probably be in your best interest to file your taxes separately until they settle their tax debts.
To avoid the most severe penalties, you should consider consulting with a tax professional. The experts at Coast One Financial Group can help review the finances of you and your spouse. They can recommend the best course of action to maximize tax refunds and minimize tax penalties.