Tax season is in full swing and if you haven't gotten your return in yet, the clock is ticking. If you're married, one of the things you'll need to decide before you file is whether to opt for a joint return or do your taxes separately.
Typically, a joint return is the smartest move, since you can cash in on some valuable tax breaks. But there are a few scenarios where it makes sense to file on your own. Here are 3 reasons married couples should consider filing taxes separately.
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1. One of you is self-employed
When you work as a freelancer, independent contractor or you own a small business, your tax situation looks very different from someone who works a traditional 9 to 5 gig. Not only are you responsible for paying income tax on the money you earn, you're also on the hook for covering your Social Security and Medicare tax. As of 2015, the self-employment tax rate is 15.3%.
Since your taxes aren't being taken out during the year, you're generally expected to make estimated quarterly payments (every three months) to cover the amount of tax you owe. If you haven't been doing that or you underestimated what you needed to be setting aside, that can add to your joint tax liability or take a big bite out of your refund. Splitting your taxes up may disqualify you from claiming certain credits or deductions but it can also sometimes minimize the amount of tax you'll owe overall.
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2. You're struggling with student loan debt
Student loan debt in the U.S. has reached staggering proportions and approximately 70% of students leave school with loans. The average debt load hovers right around $30,000 and for grads who are struggling to find their way in the job market, paying it down can be a challenge. Opting for an income-dependent repayment plan can offer some short-term relief but qualifying can be a challenge if you're married.
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If you file your return jointly, both you and your spouse's income will be considered for an income-based repayment plan even if only one of is responsible for paying the debt. When you file separately, only your income is taken into account to determine what kind of payments you qualify for. Again, you're sacrificing certain other tax benefits but if you don't have kids and you normally take the standard deduction, you may not feel as much of a pinch.
3. You have a lot of itemized deductions
Deductions can be a major boon at tax time, since they reduce your taxable income. But the IRS limits how much you can write off based on what you make. If one or both of you has a substantial amount of deductions you want to claim and there's a pretty sizable gap in what you earn, filing separate returns can allow both of you to get the full amount of tax benefits you're entitled to.
For example, if you experienced a serious illness or injury and you racked up some big out of pocket medical expenses, you can deduct the amount that exceeds 10% of your adjusted gross income. If you earn $25,000 but your spouse earns $150,000, combining your income on your taxes is going to significantly reduce the tax benefit you'd get from the deduction, if you were able to claim it all. In this case, going solo would probably yield the bigger advantage.
These are just some of the most important things married couples should keep in mind when planning their tax strategy. If you're getting divorced or you're worried about being liable for your spouse's tax debt, filing separately may be a no-brainer. When you're trying to decide what the best choice is, running the numbers can give you an idea of how much you stand to gain or lose either way.
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