Learning about one another, traveling to new places, creating a home, and planning your future are some of the many joys of marriage. Determining whether to file your taxes jointly or separately is generally not something couples look forward to doing.
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Every year, married couples have the opportunity to choose how they want to file their taxes: Married Filing Jointly or Married Filing Separately.
In most cases, the tax code in our country favors those couples who file jointly. It's important to remember that Married Filing Separately involves two individual returns, each reporting their own income, deductions, and credits. However, there are certain instances where Married Filing Separately may be beneficial.
It's common for dual-doctor couples to carry substantial student loan debt. Unfortunately, the tax deduction for interest payments on these loans often eludes couples due to income phase-out limitations.
Another way of saying this is that income limits make it difficult to get a tax deduction. However, filing separately might allow one or both spouses to get a deduction, which they couldn't if they filed jointly.
Filing separately may also help reduce the student loan payment amount under Income-Driven Repayment (IDR) calculations, which can benefit physicians pursuing Public Service Loan Forgiveness (PSLF).
In scenarios where one spouse earns significantly less income than the other and holds qualifying business income, such as income from Schedule C or pass-through entities, filing separately could make them eligible for certain Qualified Business Income deductions that would be lost under joint filing conditions, points out Seth Marshall, CPA, CFE, Tax Manager at Baum Smith Clemens, LLP.
High-earning couples frequently encounter limitations when attempting to deduct out-of-pocket medical expenses. Medical expenses must surpass a threshold relative to adjusted gross income to qualify for deductions. Filing separately could potentially lower this threshold for one spouse, thereby making it easier to be eligible for a deduction.
"Typically, high-earning couples are not eligible to deduct their out-of-pocket medical expenses. In order to be deductible, your medical expenses must be greater than 7.5% of your adjusted gross income.
"If you incurred significant medical expenses, the threshold may be easier to reach if one spouse has a lower income and has generated most of the out-of-pocket medical expenses for the year," Wayne Eager, CPA, a principal at Dark Horse CPAs, said.
When spouses file jointly, they share responsibility for taxes, interest, and penalties arising from the filed tax return. Opting for separate filings can shield one spouse's refund from being compromised by the other spouse's delinquent tax obligations, student loan liabilities, or other debts.
This protective measure becomes especially pertinent for couples navigating separation or divorce proceedings, as it can help mitigate post-divorce entanglements with the Internal Revenue Service (IRS).
Filing separately might allow each spouse to use losses to offset gains, which could be useful if one spouse had significant losses in a year.
Couples undertaking substantial adoption expenses may find filing separately advantageous, as the Adoption Tax Credit is subject to income phase-out limitations.
Here are a few to consider:
"Certain tax credits and deductions are only available to couples who file joint returns, such as the Earned Income Tax Credit. Also, if one separate filing spouse itemizes their deductions, the other spouse must also itemize (even if they don't have any qualifying expenses). In that case, they could miss out on a standard deduction," shares Charles Whaley, CPA, CHBC.
Deciding whether to file jointly or separately depends on your individual situation. Ultimately, it's crucial to weigh the potential tax advantages against the administrative convenience and other associated tax considerations of filing jointly.
It's a decision that shouldn't be taken lightly. Talking to a tax professional can help dual-doctor households make the right choice for their finances.
We appreciate Wayne Eager, Seth Marshall, and Charles Whaley, our friends and tax planning experts, for their assistance in writing this article. Their understanding of our nuanced tax code and how to apply it is invaluable.
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The team at Spaugh Dameron Tenny works to present timely educational content that benefits doctors and their unique financial situations.
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