Tax secrets of the married, please?
January 31, 2007 8:17 PM   Subscribe

How do you file (jointly or separately) when both partners make decent professional wages, no kids? Is it worse for your pocketbook than when you were single, or better?

Can someone please explain the benefits or drawbacks of married filing jointly or married filing separately if…

partner A: $85-90K, almost all salary work, maybe $5-10K freelance, usually takes standard deduction
partner B: about $100K, all freelance, Schedule C with home office

The only info I can find says that it's "bad" to marry and file separately, and "good" to file jointly, and...
1. If partners file jointly, and partner B files Schedule C, partner A must do the same and not take the standard deduction (Partner A would probably struggle to find deductions that equal the standard amount).
2. One of the benefits of filing as a married couple is that for couples where one hardly makes anything, it’s good for the couple to file jointly. This doesn’t apply to us, but does that mean that we are penalized in some way for filing jointly or separately?

I know we will probably go through all the options to figure this out for ourselves (married filing jointly vs. married filing separately, vs. single filing separately), but I’d love a preview if anyone has some insight from personal experience.

Also, are there any helpful (and authoritative and free) internet resources I have missed that specifically address this issue beyond the points made above?

Thanks in advance.
posted by tk to Work & Money (7 answers total) 1 user marked this as a favorite
From a tax perspective, yes it is bad to marry. Boy those repubs were sure the party of family values huh. They completely forgot to fix that little issue. In any event, when you have incomes like this it is prudent to use a program like Turbo Tax and figure your taxes both ways. You guys are probably better off filing jointly, but who knows.
posted by caddis at 8:22 PM on January 31, 2007

My understanding/experience is that regardless of whether you file jointly or separately, your "marriage penalty" will be the same. In that case, I'd suggest filing separately due to reason 1.
posted by Rock Steady at 4:11 AM on February 1, 2007

Well, the beginnings of an answer will be found in the Federal Tax Rate Schedules published annually by the IRS. I'll assume your total income is 190K, the max of the range you stated above.

If you file jointly, it looks like you just barely scrape by in the 28% bracket: "the tax" is about $42,000.

If you file seperately, partner A is in the 28% bracket and "the tax" for him/her is about $19,600. Partner B is in the 33% bracket and "the tax" for her/him is about 22,599. Total tax: 42,199.

Um... it's mighty close. In fact I may have rounded in the "jointly" calculation, I don't recall (sorry, this is why you pay an accountant I guess). I mean, it must be more to file seperately since one partner gets bumped into the 33% bracket. But only barely, and the second point is, this is just the initial fudge figure: no exemptions or deductions have been factored in. If you lose your standard deduction for some funky reason when filing jointly, then that could indeed tip it over the edge.

On a policy level, the tax code is structured the way it is because of various conflicting political concerns. There is effectively both a marriage "benefit" and a marriage "penalty." Caddis's take above is a bit glib, as in the lower tax brackets, filing jointly can indeed save a substantial amount of income from being taxed at a higher rate (e.g., compare the 25% bracket in those tables, single vs. filing jointly). This primarily affects single-income middle-class households, and so the congress people who pass the tax code can still plausibly defend it as "family friendly." However, two-income families lose a lot of the benefit, as you're bound to get up into the higher bracket at some point.

The "married filing seperately" category is basically a rewrite of the unmarried tax rates that's designed to prevent married taxpayers from using it. When 2-income families started cropping up more frequently in the 70s, some people realized that the marriage "benefit" was actually pretty crappy for them, and they said "screw it, we'll file seperately then." This was basically congress's way of saying "ha, you're very clever, but no." As time goes on, it seems like more and more couples will be penalized rather than benefitted by tax treatment of marriage, and so perhaps a change is in the works. Alas, not for 2007.
posted by rkent at 5:02 AM on February 1, 2007

Get an accountant, and have them do it for you. They'll do it right, and go to bat for you if you're audited. It costs me $200 to have the best accountant within a 30 mile radius do them, it's a small price to pay.
posted by Spoonman at 6:18 AM on February 1, 2007

This question was asked yesterday, you know.

Is there not a guide, in the front of your tax booklet, as to the tax statuses in order of desirability?

Married filing separately is NOT a rewrite of the individual brackets. What it is, is married filing jointly, split in half. It's usually used when the spouses hate each other and refuse to share financial information with each other, because they are separated or divorcing. It is not financially advantageous. In your situation, where the partners have equivalent incomes, it probably wouldn't hurt you much to file separately, but it won't help.

I will also reiterate the standard tax answer, which will be applicable in almost all tax questions asked from now until April 15, because the questioner won't have provided enough information to answer the question in any other way: do your taxes both ways and see which one is better.
posted by jellicle at 6:30 AM on February 1, 2007

I know nothing about taxes and this may be totally wrong...but I THINK if you file jointly, the freelance person won't have to pay estimated quarterly payments as long as the other one has a job where taxes are withheld.
posted by bink at 8:49 PM on February 1, 2007

if you file jointly, the freelance person won't have to pay estimated quarterly payments as long as the other one has a job where taxes are withheld.

only if you don't get too behind for the year. We used to have this lovely system at work where you could submit a one time W4 form to basically take your last paycheck or two for the year and devote it all to taxes. Then you could go light on withholding for the rest of the year and make $ on the interest etc. Alas, no more. It was also great when you realized at the end of the year that you were jammed up by not paying enough. If you make up the difference in a quarterly payment they will still dock you for not paying in the appropriate quarter (for instance if you have big income in January you had better pay estimated taxes in the first quarter or face penalties and interest). Yet if you make your payments through withholding it doesn't matter when they are made as long as they are made within the tax year. For people with stock options these geeky intrigues actually matter.

For a married couple, almost always you benefit by filing jointly. jellicle is correct, the filing separate category is basically for seperated and misfit couples. However, if one spouse has many, many deductible expenses, it can sometimes pay to file seperately and thus lower that spouse's taxes below what even the joint benefit could be. Details matter, that is why I say you must really do them both ways and then see which one is lower.
posted by caddis at 9:32 PM on February 1, 2007

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