Filing jointly or separately as a married couple: What’s the difference?

When you file your tax return, a tax filing status must be chosen. This status is used to determine your standard deduction, tax rates, eligibility for certain tax breaks and your correct tax.

The five filing statuses are:

• Single
• Married filing jointly,
• Married filing separately,
• Head of household, and
• Qualifying surviving spouse.

If you’re married, you may wonder if you should file joint or separate tax returns. It depends on your individual tax situation.

In general, you should choose the filing status that results in the lowest tax. But keep in mind that, if you and your spouse file a joint return, each of you is “jointly and severally” liable for the tax on your combined income. And you’re both equally liable for any additional tax the IRS assesses, plus interest and most penalties. That means the IRS can come after either of you to collect the full amount.

Although there are “innocent spouse” provisions in the law that may offer relief, they have limitations. Therefore, even if a joint return results in less tax, some people may still choose to file separately if they want to only be responsible for their own tax. This might occur when a couple is separated.

In most cases, filing jointly offers the most tax savings, especially when the spouses have different income levels. Combining two incomes can bring some money out of a higher tax bracket. Filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use “married filing separately” rates. They’re less favorable than the single rates.

However, there are cases when married couples may save tax by filing separately — for example, when one spouse has significant medical expenses. Medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in a larger total deduction.

Only on a joint return

Keep in mind that some tax breaks are only available on a joint return. The child and dependent care credit, adoption expense credit, American Opportunity tax credit and Lifetime Learning credit are only available to married couples on joint returns. And you can’t take the credit for the elderly or the disabled if you file separately unless you and your spouse lived apart for the entire year. You also may not be able to deduct IRA contributions if you or your spouse were covered by an employer retirement plan and you file separate returns. And you can’t exclude adoption assistance payments or interest income from Series EE or Series I savings bonds used for higher education expenses.

Social Security benefits

Social Security benefits may be taxed more when married couples file separately. Benefits are tax-free if your “provisional income” (AGI with certain modifications, plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return, but zero on separate returns (or $25,000 if the spouses didn’t live together for the whole year).

Circumstances matter

The filing status decision you make when filing your federal tax return may affect your state or local income tax bill, so the total tax impact should be compared. There may not be a simple answer as to whether a couple should file jointly or separately. Various factors must be examined. We can help you make the most advantageous choice. Contact us to prepare your return or if you have any questions.

© 2024

The so-called “kiddie tax” can cause some of a child’s unearned income to be taxed at the parent’s higher marginal federal income tax rates instead of at the usually much lower rates that a child would otherwise pay. For purposes of this federal income tax provision, a “child” can be up to 23 years old. So, the kiddie tax can potentially affect young adults as well as kids.

Kiddie tax basics

Perhaps the most important thing to know about this poorly understood provision is that, for a student, the kiddie tax can be an issue until the year that he or she turns age 24. For that year and future years, your child is finally kiddie-tax-exempt.

The kiddie tax is only assessed on a child’s (or young adult’s) unearned income. That usually means interest, dividends and capital gains. These types of income often come from custodial accounts that parents and grandparents set up and fund for younger children.

Earned income from a job or self-employment is never subject to the kiddie tax.

Calculating the tax

To determine the kiddie tax, first add up the child’s (or young adult’s) net earned income and net unearned income. Then subtract the allowable standard deduction to arrive at the child’s taxable income.

The portion of taxable income that consists of net earned income is taxed at the regular federal income tax rates for single taxpayers.

The portion of taxable income that consists of net unearned income that exceeds the standard deduction ($2,600 for 2024 or $2,500 for 2023) is subject to the kiddie tax and is taxed at the parent’s higher marginal federal income tax rates.

The tax is calculated by completing an IRS form, which is then filed with the child’s Form 1040.

Is calculating and reporting the kiddie tax complicated? It certainly can be. We can handle the task when we prepare your tax return.

Is your child exposed?

Maybe. For 2023, the relevant IRS form must be filed for any child or young adult who:

• Has more than $2,500 of unearned income;
• Is required to file a Form 1040;
• Is under age 18 as of December 31, 2023, or is age 18 and didn’t have earned income in excess of half of his or her support, or is between ages 19 and 23 and a full-time student and didn’t have earned income in excess of half of his or her support;
• Has at least one living parent; and
• Didn’t file a joint return for the year.

For 2024, the same rules apply except the unearned income threshold is raised to $2,600.

Don’t let the tax sneak up on you

The kiddie tax rules are pretty complicated, and the tax can sneak up on the unwary. We can determine if your child is affected and suggest strategies to minimize or avoid the tax. For example, your child could invest in growth stocks that pay no or minimal dividends and hold on to them until a year when the kiddie tax no longer applies. Contact us if you have questions or want more information.

© 2024

The optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up by 1.5 cents per mile in 2024. The IRS recently announced that the cents-per-mile rate for the business use of a car, van, pickup or panel truck will be 67 cents (up from 65.5 cents for 2023).

The increased tax deduction partly reflects the price of gasoline, which is about the same as it was a year ago. On December 21, 2023, the national average price of a gallon of regular gas was $3.12, compared with $3.10 a year earlier, according to AAA Gas Prices.

Standard rate vs. tracking expenses

Businesses can generally deduct the actual expenses attributable to business use of vehicles. These include gas, tires, oil, repairs, insurance, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.

The cents-per-mile rate is helpful if you don’t want to keep track of actual vehicle-related expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.

The standard rate is also used by businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.

If you use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, reimbursements to employees could be considered taxable wages to them.

Rate calculation

The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repairs and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the rate midyear.

Not always allowed

There are cases when you can’t use the cents-per-mile rate. In some situations, it depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it hinges on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.

As you can see, there are many factors to consider in deciding whether to use the standard mileage rate to deduct business vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2024 — or claiming 2023 expenses on your 2023 tax return.

© 2023

Monetary awards and settlements are often provided for an array of reasons. For example, a person could receive compensatory and punitive damage payments for personal injury, discrimination or harassment. Some of this money is taxed by the federal government, and perhaps by state governments. Hopefully, you’ll never need to know how payments for personal injuries are taxed. But here are the basic rules — just in case you or a loved one does receive an award or settlement and needs to understand them.

Under tax law, individuals are permitted to exclude from gross income damages that are received on account of a personal physical injury or a physical sickness. It doesn’t matter if the compensation is from a court-ordered award or an out-of-court settlement, and it makes no difference if it’s paid in a lump sum or installments.

Emotional distress doesn’t count

For purposes of this exclusion, emotional distress is not considered a physical injury or physical sickness. So, for example, an award under state law that’s meant to compensate for emotional distress caused by age discrimination or harassment would have to be included in gross income. However, if you require medical care for treatment of the consequences of emotional distress, then the amount of damages not exceeding those expenses would be excludable from gross income.

Punitive damages for any personal injury claim, whether or not physical, aren’t excludable from gross income unless awarded under certain state wrongful death statutes that provide for only punitive damages.

The law doesn’t consider back pay and liquidated damages received under the Age Discrimination in Employment Act (ADEA) to be paid in compensation for personal injuries. Thus, an award for back pay and liquidated damages under the ADEA must be included in gross income.

Court cases

As you may suspect, the IRS and courts often decide that awards and settlements are taxable while many taxpayers feel they should be excluded from taxable income. For example, in one case, a taxpayer was injured while at a hospital. She sued for negligence but lost her case. She then sued her attorney for legal malpractice and was awarded $125,000. The IRS said the amount was taxable because it wasn’t for physical injuries. The U.S. Tax Court and the 9th Circuit Court of Appeals agreed. (Blum, 3/23/22)

In another case, the Tax Court ruled that married taxpayers weren’t entitled to income exclusion for a settlement the husband received from his former employer in connection with an employment discrimination / wrongful termination lawsuit. Although the settlement agreement provided for payment “for alleged personal injuries,” there was no evidence that it was paid on account of physical injuries or sickness. (TC Memo 2022-90)

Legal fees

You can’t deduct attorney fees incurred to collect a tax-free award or settlement for physical injury or sickness. However, to a limited extent, attorney’s fees (whether contingent or non-contingent) or court costs paid by, or on behalf of, a taxpayer in connection with an action involving certain employment-related claims, are currently deductible from gross income to determine adjusted gross income.

After-tax recovery

Keep in mind that, while you want the best tax result possible from any settlement, lawsuit or discrimination action you’re considering, non-tax legal factors, together with the tax factors, will determine the amount of your after-tax recovery. Consult with your attorney on the best way to proceed and we can provide any tax guidance that you may need.

© 2023