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Married Filing Separately

 If you are married, filing jointly will usually result in the lowest taxes. But there are important reasons to think about filing separately.

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Full Transcript below:

Speaker 1 (00:07):

Welcome back once again to 30 Minute Money, the podcast that delivers action-oriented smart money ideas and bite-sized pieces. I'm Scott Fitzgerald at Roc Vox Recording and production in Bushnell's Basin just outside of Rochester. And Steve Wershing from Focused Wealth Advisors, my good podcasting friend here in studio once again. So we're talking, I have to bring it up because in a previous episode I brought up one of my favorite movies, which is the Shawshank Redemption, where Andy Dufrene says he's getting held over the corner, the edge of the building, and the guy says, he says, there's no reason why you should have to pay taxes on that $30,000. You can give it all to your wife for a one-time tax free gift. And that's been on my mind ever since. And this is the time for you to either prove or disprove that

Speaker 2 (00:56):

Rumor. Yes. Well, so I think the point of that was that if you transferred it to your wife, you wouldn't have to pay tax on it. Yeah. Yep. And actually that may or may not be the case. So that's what we're going to talk about today. Well,

Speaker 1 (01:12):

I mean, things have changed since the thirties, so

Speaker 2 (01:15):

That's true

Speaker 1 (01:16):

When that's true. Movie took

Speaker 2 (01:17):

Place. That's right. Exactly. I don't know if this is one of 'em, I don't know, but now I'm going to have to look that up. But anyway, but these days, so what we're going to talk about is what the IRS would call your filing status. And so before you get married, you're a single filer, and then typically when you get married, you file jointly, and typically that's the best way to do it. That's the way to go. However, you don't have to do it that way. There is another status that you can use called married filing separately, where you basically each file independently a tax return. And we're going to talk a little bit about the pluses and minuses of doing that because a lot of people every year have the question, why does this even exist? Why would I even consider filing separately from my spouse?


And so we're going to talk about that. So importantly, most of the time it's not what you want to do most of the time, it just works out much better if you're married that you file jointly with your spouse because the tax brackets are higher, the standard deduction is higher, and importantly, you lose a lot of benefits if you are married and you file independently. So for example, if you lose capital loss deductions, so if you have losses, if you've sold things at a loss, you can only write that off against capital gains. And a little bit of it can be written off against income, and whatever's not written off against income carries over to the next year. And if you file separately, then you can claim less of those losses than if you were filing. More importantly, you lose things like deductibility of child and dependent care.


And so if you have a lot of deductions that you could take for childcare, you would lose a lot of them potentially by filing separately. If you can claim an earned income credit, that becomes a lot harder. If you are filing separately as a married couple, if you want to take credits or deductions for educational expenses. So the American Opportunity tax credit, which is if you are getting educated, you would potentially lose that if you filed separately and if you have kids that you're paying for education, or if you have kids that you're paying for their education, you lose the lifetime learning credit. And from my standpoint, the one that I see most frequently is that if you're married filing separately, your ability to contribute to a Roth basically goes away. If you are a single taxpayer, you can contribute to the phase out for that ability. It doesn't happen until you're into the six figures. If you're a married couple, you can contribute to Roth IRAs up until your income is into the two hundreds. But if you're married filing separately, it goes away at about $10,000 of income. So effectively, if you file separately as a married couple, you basically can't contribute new money to a Roth IRA. So those are all benefits that go away. Would you

Speaker 1 (04:28):

Say that they designed these rules to sort of guide people to filing jointly?

Speaker 2 (04:34):

Oh, absolutely.

Speaker 1 (04:35):

It definitely made it harder for people if you wanted to file separately,

Speaker 2 (04:39):

Right? Yep, absolutely. One of the things that, maybe we'll do an episode on this sometimes sometime, but there's a lot of social engineering that goes on in the tax code. I mean, it's not just economics that plays into that. If Congress wants to motivate you to do one thing or another, they'll write it into the tax code, and we could have arguments about whether or not that's legitimate or ethical, but the fact is that's how it is. So absolutely the government wants, if you're married, they very much want you to file jointly, and so they build in all kinds of disincentives for doing it. Now, having said that, there are some good reasons to file separately sometimes, and so depending on your situation, these are things that are worth considering. Probably the biggest one, the one that I see most frequently is if one member of a couple has a lot of student debt and they are on an income-based repayment plan, then filing separately allows the partner who has the student debt to potentially have to make much lower debt payments because the debt payments are capped at a certain proportion of income. And

Speaker 1 (05:47):

Would it otherwise it would be income, it would be household income, yeah, instead of just a single person.

Speaker 2 (05:52):

That's right. That's right. So if you're making student loan payments and you find that you're on an income-based repayment plan, and you find that if you just file for your income, you would not have to make what the calculated payment would be, you could pay substantially less for that. This is particularly valuable if you are working for a nonprofit and you stand to benefit from the public service loan forgiveness program. So under the PSLF, if you have a government loan for student aid and you work for 10 years paying that off at the end of the 10th year, they'll forgive whatever's still outstanding. So if you are, for example, a teacher and you've got lots of student debt from getting your master's in education, there might be a strong argument for filing separately from your spouse and doing that for 10 years. It suppresses the income-based repayment that you'd have to make, and that means that there is as much of that debt as possible preserved for the 10th year when it will all get forgiven.


So that's probably the biggest, most the single most often reason I see for matter filing separately, but there are other ones as well. So that's generally younger couples that would be doing that. When we get to the other end of the age range and we get to retirees or people who are closer to retirement, if one member of the couple has significant medical expenses, medical expenses are only deductible to the extent to which they exceed seven and a half percent of adjusted gross income. If one of you has significant medical bills and not both of you, if you file separately, it's a lot easier for you to reach that seven and a half percent threshold than if you file as a household. So if you have big doctor bills, you might want to consider filing separately because you might be able to itemize deductions and claim that as a deduction against your income for the year.


And then we get into a couple of more specialized cases. So let's say that your marriage is not going that well or you're nervous about the relationship or somehow distrustful of your spouse. One reason and perfectly legitimate, and I hope that nobody who's listening to this falls into this, however, if you're in a situation where you just are concerned that your spouse is doing shady things, if you filed jointly, you are both responsible for the accuracy of that tax return. If you file separately, you are only held legally responsible for the representations you make on your own return. And so I hope against hope that nobody who's listening to this falls into that situation. But if you have concerns that your spouse is doing something that's not really totally on the up and up, you may want to file separately because that way you can't be held legally responsible for any of the representations that are being made on that other tax return.


And similarly, if you get married to somebody, or if you are married to somebody who owes a lot of past taxes, and that's a liability that never goes away. I mean, you can't discharge it in bankruptcy. It's one of those things you can't ever escape. So if you marry somebody who's got significant unpaid back taxes, you might want to seriously think about filing separately because then they can't come chase you for it. If you start filing jointly, then again, you're both on the hook for it. You're both responsible for it. So if you get married to somebody who had unfortunate financial events that happened before and they ended up falling way behind with the IRS, you may want to consider filing separately because that way the IS can't chase you for some of those things that your spouse may have brought into the marriage. And

Speaker 1 (09:48):

That might be something that people should ask about.

Speaker 2 (09:52):

Yeah, I never asked. I would never have thought. Yeah. It is kind of like prenuptial agreements, right? Getting married is more than just a personal relationship, and it's more than just about love. I mean, there's all kinds of other implications that come with it, and yeah, you should really have a good thorough conversation about finances before you ever tie the knot. Before we do this,

Speaker 1 (10:15):

I'm going to need you to fill this out, inate.

Speaker 2 (10:17):

Exactly. I really, I love you. Can I have a net worth statement? Please? Can I see five years of tax returns that'll lighter fire I

Speaker 3 (10:30):

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Speaker 1 (11:56):

Filing separately. Filing jointly. What's your 30 minute action item?

Speaker 2 (12:00):

30 minute action items. Look at things that you could potentially deduct and decide if it makes sense to file separately.

Speaker 1 (12:07):

All right. Make sure it makes sense to check out 30 minute Money.

Speaker 2 (12:11):

It always makes sense to check out

Speaker 1 (12:13):

30 minute money. Yes, three zero minute dot money. It's on all of the platforms. Make sure you like and subscribe and tell your friends, and we will see you next time on 30 Minute Money.