Taxes, Filing, & Spouse Wage Gap

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Snowjob
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Taxes, Filing, & Spouse Wage Gap

Post by Snowjob »

This is all hypothetical as I am not married and know very little about how taxes change once you are but are there any circumstances where it makes sense to file separately even though your married?

For example, if one person is self employed and the other works for an employer, I would think this makes sense for simplicity. But what about a wage gap, if one person makes say 100k and the other person makes 30k, would it make sense to file seperately to take advantage of different tax vehicals that would be phased out at the higher level (longer term tax diversification move), or certain credits? I quickly perused the wiki but I didnt see much in the way of tax advice which I know is not the general point of this forum, but through the lense of investment planning, is there a way to take advantage of having a spouse who makes considerably less money by filing seperately instead of joinly?
livesoft
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Re: Taxes, Filing, & Spouse Wage Gap

Post by livesoft »

I don't see a problem. The $30K spouse contributes $17,500 to 401(k) and $6450 to HSA and $5500 to traditioinal IRA there is no income to tax and no wage gap.
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celia
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Re: Taxes, Filing, & Spouse Wage Gap

Post by celia »

Yes, there is an available filing status of "Married, filing Separately". For a minority of couples it is beneficial, say, when there is a big difference in their incomes and the smaller income person has big medical expenses and they itemize (whereas jointly the floor for medical expense deductions would be higher).

Some people who think they may run for office in a few years and have to release their tax return may use it so their spouse's income is kept private.

And if one spouse suspects the other is not reporting all income (or even filing, though required), they may want to file separately to protect himself/herself from participating in the fraud.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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tfb
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Re: Taxes, Filing, & Spouse Wage Gap

Post by tfb »

Snowjob wrote:is there a way to take advantage of having a spouse who makes considerably less money by filing seperately instead of joinly?
Usually it's just the opposite. You want to file jointly so you can steal her low brackets.
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celia
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Re: Taxes, Filing, & Spouse Wage Gap

Post by celia »

tfb wrote:Usually it's just the opposite. You want to file jointly so you can steal her low brackets.
her??? :!:
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Snowjob
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Re: Taxes, Filing, & Spouse Wage Gap

Post by Snowjob »

Ok so file joinly to reduce the bracket thats an interesting idea I hadnt thought of lol. I guess I'm just completely new to the topic. Would that change if say there is a small business involved? I just assume that for simplicity if one runs a sole prop, that it would make sense to keep things seperate? Maybe if you combine, its still worth the reduction in total tax rate -- though I'm currous how that would work with the self employed wage tax?
sscritic
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Re: Taxes, Filing, & Spouse Wage Gap

Post by sscritic »

Snowjob wrote:Ok so file joinly to reduce the bracket thats an interesting idea I hadnt thought of lol. I guess I'm just completely new to the topic. Would that change if say there is a small business involved? I just assume that for simplicity if one runs a sole prop, that it would make sense to keep things seperate? Maybe if you combine, its still worth the reduction in total tax rate -- though I'm currous how that would work with the self employed wage tax?
Buy tax software. Run it three ways. The three ways are His, Hers, and Theirs. Add His and Hers. Compare to Theirs. I think you will see the answer for your situation. Other people's situations are irrelevant to you.

Now I know you aren't married; this is a hypothetical. You still want to follow the steps above using HHis, HHers, and HTheirs. You will see the answer for your hypothetical situation. Other people's hypothetical situations are less relevant to you.
PreemieNurse
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Re: Taxes, Filing, & Spouse Wage Gap

Post by PreemieNurse »

celia wrote:
tfb wrote:Usually it's just the opposite. You want to file jointly so you can steal her low brackets.
her??? :!:
Glad I'm not the only one who did a double take at the gender assumption. When we were first married, I was making almost double my husband's salary. I know it's traditional for the male to be the breadwinner, but in my profession, it's mostly women bringing home the money and the benefits. There are a few stay at home dads among my coworker's husbands.

To OP, our tax preparation software let me play out both scenarios - filing joint or doing married/filing separately. Even with our income gap, it worked out better to just file joint.
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tfb
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Re: Taxes, Filing, & Spouse Wage Gap

Post by tfb »

celia wrote:
tfb wrote:Usually it's just the opposite. You want to file jointly so you can steal her low brackets.
her??? :!:
I apologize. I got this confused with the other thread I replied to. I should know better because my wife has earned more than I do practically every year since our first jobs.
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MathWizard
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Re: Taxes, Filing, & Spouse Wage Gap

Post by MathWizard »

For us, with a large disparity in income, and in the lower tax brackets,
MFJ for federal and MFS for state has always been optimal, and this is a very common situation.

State taxes are high here, so the state income tax is important to consider.

I used to do both with pencil and paper and choose whichever is better, now I let the tax software
do it for me.
Dianne
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Re: Taxes, Filing, & Spouse Wage Gap

Post by Dianne »

Snowjob wrote:Ok so file joinly to reduce the bracket thats an interesting idea I hadnt thought of lol. I guess I'm just completely new to the topic. Would that change if say there is a small business involved? I just assume that for simplicity if one runs a sole prop, that it would make sense to keep things seperate? Maybe if you combine, its still worth the reduction in total tax rate -- though I'm currous how that would work with the self employed wage tax?
No, being self-employed typically doesn't change the analysis. The self-employment tax is based solely on the self-employment income and will be the same regardless of whether you file jointly or separately; it's handled on Schedule SE. The self-employed person running a sole proprietorship also fills out a Schedule C that separately reports all the income and expenses of the business, and then the net income is added to the joint return so that the spouse with more income (whichever one that is) gets the benefit of the other spouse's lower brackets.

The joint tax return was invented to benefit married couples with a wage gap. And it works. In a few situations, which someone else already explained (large medical expenses, suspected tax fraud), filing separately produces a better outcome. But most couples are better off filing jointly.

By the way, in case what I've said above creates any confusion, this is a separate issue from the marriage penalty for couples with similar incomes. If you file as "married filing separately" the rates are set so that you still pay any marriage penalty. In order to avoid the marriage penalty, the couple has to actually get divorced (or never marry) and then file as "single."
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archbish99
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Re: Taxes, Filing, & Spouse Wage Gap

Post by archbish99 »

PreemieNurse wrote:There are a few stay at home dads among my coworker's husbands.
Just how many husbands does your coworker have?!? :D

More seriously, it's an artifact of how the US tax code attempts to be "fair" to seemingly-equivalent situations. The following cannot both be true:
  • Individuals making $100,000/year should pay the same amount per year, whether married or single
  • Couples which jointly make $100,000/year should pay the same amount per year, regardless of the income split between the individuals
The current system offers an advantage to a couple with one high earner and one lower earner, and sacrifices "fairness" in the first case.
I'm not a financial advisor, I just play one on the Internet.
PreemieNurse
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Re: Taxes, Filing, & Spouse Wage Gap

Post by PreemieNurse »

archbish99 wrote:
PreemieNurse wrote:There are a few stay at home dads among my coworker's husbands.
Just how many husbands does your coworker have?!? :D

Haha, a misplaced apostrophe sure changes the context. I shouldn't post after working 12.5 hour shifts :)
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