Does filing taxes "Married Filing Separately" make sense in our situation?
Does filing taxes "Married Filing Separately" make sense in our situation?
Dear bogleheads, I would greatly appreciate your input on our situation.
We have always filed our taxes "MFJ" but wondering if our situation this year would benefit from "MFS" (Married Filing Separately).
Our combined income is approx 250k (I make about 200k and spouse makes ~50k) with a marginal tax bracket for MFJ of 24%. If we file jointly for 2021, we expect to take standard deduction, so it's kind of straight forward. However, this year, we bought and sold an individual stock in our joint brokerage account, which generated about ~20k in short-term capital gains.
If we choose to file separately, can the lower earning spouse include the entire capital gains on his/her tax return (assuming it means reduces total tax burden) or does it need to be split 50/50 because the money was invested in our joint account? Or is there a different way?
TIA
We have always filed our taxes "MFJ" but wondering if our situation this year would benefit from "MFS" (Married Filing Separately).
Our combined income is approx 250k (I make about 200k and spouse makes ~50k) with a marginal tax bracket for MFJ of 24%. If we file jointly for 2021, we expect to take standard deduction, so it's kind of straight forward. However, this year, we bought and sold an individual stock in our joint brokerage account, which generated about ~20k in short-term capital gains.
If we choose to file separately, can the lower earning spouse include the entire capital gains on his/her tax return (assuming it means reduces total tax burden) or does it need to be split 50/50 because the money was invested in our joint account? Or is there a different way?
TIA
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
You cannot arbitrarily alloc capital gains like your hoping....
|
Rob |
Its a dangerous business going out your front door. - J.R.R.Tolkien
- quantAndHold
- Posts: 10141
- Joined: Thu Sep 17, 2015 10:39 pm
- Location: West Coast
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
MFS is almost always worse than MFJ, tax brackets and deduction phaseouts are generally unfavorable. But it’s easy enough to try both out in your tax software of choice and see which works better.
I don’t know the answer to your specific question, but I suspect you’ll need to split the sale. Even if you can put it entirely on your wife’s return, with your high income, I suspect you’ll still come out better with MFJ.
Are you in a community property state, by chance? In community property states and MFS, you have to use the income splitting method, which basically means you add up both of your incomes, divide by 2, and each report that amount.
I don’t know the answer to your specific question, but I suspect you’ll need to split the sale. Even if you can put it entirely on your wife’s return, with your high income, I suspect you’ll still come out better with MFJ.
Are you in a community property state, by chance? In community property states and MFS, you have to use the income splitting method, which basically means you add up both of your incomes, divide by 2, and each report that amount.
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
Yes, we live in a community property state.quantAndHold wrote: ↑Sat Dec 04, 2021 3:06 pm MFS is almost always worse than MFJ, tax brackets and deduction phaseouts are generally unfavorable. But it’s easy enough to try both out in your tax software of choice and see which works better.
I don’t know the answer to your specific question, but I suspect you’ll need to split the sale. Even if you can put it entirely on your wife’s return, with your high income, I suspect you’ll still come out better with MFJ.
Are you in a community property state, by chance? In community property states and MFS, you have to use the income splitting method, which basically means you add up both of your incomes, divide by 2, and each report that amount.
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
I'd recommend using your tax software to do some what-if analysis.
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
Do you have any children/dependents? If so, that may favor filing separately if the lower earning spouse can claim the children which might make them eligible for expanded child tax credits and $1400 recovery payments that would otherwise be phased out due to income if filing jointly.
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
Correct. I've done hundreds of returns over the last 10+ years and I can only recall three cases where it worked to the taxpayers' advantage to file MFS. The only practical way to find out is to do it both ways.quantAndHold wrote: ↑Sat Dec 04, 2021 3:06 pm MFS is almost always worse than MFJ, tax brackets and deduction phaseouts are generally unfavorable. But it’s easy enough to try both out in your tax software of choice and see which works better.
I had one case where each spouse lived in different states and worked in the opposite state - it was crazy. I think I ended up doing 12 returns to find the optimal solution (DE was one state and you can file separate in DE even if you file joint in MD.).
Stay hydrated; don't sweat the small stuff
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
Have 2 young kids.GTBuzz wrote: ↑Sat Dec 04, 2021 3:21 pm Do you have any children/dependents? If so, that may favor filing separately if the lower earning spouse can claim the children which might make them eligible for expanded child tax credits and $1400 recovery payments that would otherwise be phased out due to income if filing jointly.
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
Many things are lost when filing separately. Roth IRA contributions come to mind as well as a number of tax credits. Perhaps if you do an internet search, you could find a list of the things that might be lost.
Link to Asking Portfolio Questions
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
Since you live in a community property state, MFS requires a lot of extra work for very little extra benefits.katnok wrote: ↑Sat Dec 04, 2021 3:13 pmYes, we live in a community property state.quantAndHold wrote: ↑Sat Dec 04, 2021 3:06 pm MFS is almost always worse than MFJ, tax brackets and deduction phaseouts are generally unfavorable. But it’s easy enough to try both out in your tax software of choice and see which works better.
I don’t know the answer to your specific question, but I suspect you’ll need to split the sale. Even if you can put it entirely on your wife’s return, with your high income, I suspect you’ll still come out better with MFJ.
Are you in a community property state, by chance? In community property states and MFS, you have to use the income splitting method, which basically means you add up both of your incomes, divide by 2, and each report that amount.
I suggest that you read IRS Pub 555 to get some understanding of what may be involved.
https://www.irs.gov/pub/irs-pdf/p555.pdf
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
Will do. Thank youHueyLD wrote: ↑Sat Dec 04, 2021 3:43 pmSince you live in a community property state, MFS requires a lot of extra work for very little extra benefits.katnok wrote: ↑Sat Dec 04, 2021 3:13 pmYes, we live in a community property state.quantAndHold wrote: ↑Sat Dec 04, 2021 3:06 pm MFS is almost always worse than MFJ, tax brackets and deduction phaseouts are generally unfavorable. But it’s easy enough to try both out in your tax software of choice and see which works better.
I don’t know the answer to your specific question, but I suspect you’ll need to split the sale. Even if you can put it entirely on your wife’s return, with your high income, I suspect you’ll still come out better with MFJ.
Are you in a community property state, by chance? In community property states and MFS, you have to use the income splitting method, which basically means you add up both of your incomes, divide by 2, and each report that amount.
I suggest that you read IRS Pub 555 to get some understanding of what may be involved.
https://www.irs.gov/pub/irs-pdf/p555.pdf
-
- Posts: 2407
- Joined: Sat Jun 27, 2020 4:05 pm
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
Because of the aggressive phase out of the last EIP, it's possible that MFS is better, putting the kids on the lower income return. Otherwise, I doubt it, but you can always run the numbers both ways. It's worthwhile to understand taxes enough to at least estimate this yourself.katnok wrote: ↑Sat Dec 04, 2021 3:22 pmHave 2 young kids.GTBuzz wrote: ↑Sat Dec 04, 2021 3:21 pm Do you have any children/dependents? If so, that may favor filing separately if the lower earning spouse can claim the children which might make them eligible for expanded child tax credits and $1400 recovery payments that would otherwise be phased out due to income if filing jointly.
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
Katnok - Like another poster here previously mentioned, I very seldom (maybe one percent of the time) see where using married filing separately (MFS) filing status as being beneficial. Take a look online (www.irs.gov) at IRS publication 17, Chapter 2 about MFS filing status and in particular the Special Rules section.
Tom D.
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
I'm in the same boat. Somebody can correct me if I'm wrong, but given the incomes you stated, the combined Child Tax Credit and Third Economic Impact Payment for you under each filing status I believe would be as follows:katnok wrote: ↑Sat Dec 04, 2021 3:22 pmHave 2 young kids.GTBuzz wrote: ↑Sat Dec 04, 2021 3:21 pm Do you have any children/dependents? If so, that may favor filing separately if the lower earning spouse can claim the children which might make them eligible for expanded child tax credits and $1400 recovery payments that would otherwise be phased out due to income if filing jointly.
Married Filing Jointly:
$0 for 3rd EIP (assuming you did not qualify for the advance payments)
$4,000 for CTC (2 children x $2,000)
$4,000 Total
Married Filing Separately:
$4,200 for 3rd EIP (Spouse + 2 Dependents)
$7,200 for CTC (2 children 5 and under x $3,600)
$11,400 Total
Yes, you'll pay a higher effective tax rate on your income and might even trigger some additional Medicare or Investment Income taxes, which is why in most prior years MFJ would probably be the way to go. But given the *huge* potential difference in credits, it's very possible your total tax bill could still be *significantly* less by filing separate in 2021.
-
- Posts: 93
- Joined: Sat Mar 30, 2013 10:05 am
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
GTBuzz wrote: ↑Sat Dec 04, 2021 8:45 pmI'm in the same boat. Somebody can correct me if I'm wrong, but given the incomes you stated, the combined Child Tax Credit and Third Economic Impact Payment for you under each filing status I believe would be as follows:katnok wrote: ↑Sat Dec 04, 2021 3:22 pmHave 2 young kids.GTBuzz wrote: ↑Sat Dec 04, 2021 3:21 pm Do you have any children/dependents? If so, that may favor filing separately if the lower earning spouse can claim the children which might make them eligible for expanded child tax credits and $1400 recovery payments that would otherwise be phased out due to income if filing jointly.
Married Filing Jointly:
$0 for 3rd EIP (assuming you did not qualify for the advance payments)
$4,000 for CTC (2 children x $2,000)
$4,000 Total
Married Filing Separately:
$4,200 for 3rd EIP (Spouse + 2 Dependents)
$7,200 for CTC (2 children 5 and under x $3,600)
$11,400 Total
Yes, you'll pay a higher effective tax rate on your income and might even trigger some additional Medicare or Investment Income taxes, which is why in most prior years MFJ would probably be the way to go. But given the *huge* potential difference in credits, it's very possible your total tax bill could still be *significantly* less by filing separate in 2021.
+1
MFS saved us about $5k last year based on the interactions with child tax credits. With all these different changes the past year with credits, etc it's a great idea to run both scenarios. CPA ran both cases relatively easy for us, but if DYI it can be done easy enough in tax caster or HR block software too.
Your original question was if you could attribute the capital gains in the joint account to either you or your wife. I don't have the answer but am interested in the answer. We aren't in a community prop state, so that might be different too.
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
Keep in mind that if you live in a community property state, you have to allocate the wages 50% to each spouse regardless of which spouse earned them. State law can also affect allocation of interest, dividends capital gains, etc.
Here is a couple articles that address the topic of allocating income between spouses.
https://www.irs.gov/publications/p555
https://turbotax.intuit.com/tax-tips/ma ... /L4jG7cq7Z
Here is a couple articles that address the topic of allocating income between spouses.
https://www.irs.gov/publications/p555
https://turbotax.intuit.com/tax-tips/ma ... /L4jG7cq7Z
-
- Posts: 2407
- Joined: Sat Jun 27, 2020 4:05 pm
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
I would be interested to know as well. When I looked I could find no guidance for non community property states. As far as I know, you can split up as you like.MechEngOSU wrote: ↑Sun Dec 05, 2021 9:22 amWe aren't in a community prop state, so that might be different too.
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
AnEngineer
In a non-community property state the income is reported separately on each return and in accordance with the separate income and other documents that each person has in their name and social security number. I have prepared many married filing separately (MFS) tax returns over my years with the Tax Counseling for the Elderly and Volunteer Income Tax Assistance programs sponsored by the IRS. These returns were in such a state.
In a non-community property state the income is reported separately on each return and in accordance with the separate income and other documents that each person has in their name and social security number. I have prepared many married filing separately (MFS) tax returns over my years with the Tax Counseling for the Elderly and Volunteer Income Tax Assistance programs sponsored by the IRS. These returns were in such a state.
Tom D.
- quantAndHold
- Posts: 10141
- Joined: Thu Sep 17, 2015 10:39 pm
- Location: West Coast
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
OP is in a community property state. There is no lower earning spouse. They each make $125k, and they each get $10k of the capital gains.
-
- Posts: 2407
- Joined: Sat Jun 27, 2020 4:05 pm
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
What about income from joint accounts?tomd37 wrote: ↑Sun Dec 05, 2021 7:18 pm AnEngineer
In a non-community property state the income is reported separately on each return and in accordance with the separate income and other documents that each person has in their name and social security number. I have prepared many married filing separately (MFS) tax returns over my years with the Tax Counseling for the Elderly and Volunteer Income Tax Assistance programs sponsored by the IRS. These returns were in such a state.
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
Income from a joint account has to be reported under one social security number and that would be where it is reported.
Tom D.
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
For a brokerage account owned jointly by spouses in a non-community property state, the IRS will consider any gains or losses 50% allocable to each spouse.AnEngineer wrote: ↑Sun Dec 05, 2021 4:46 pmI would be interested to know as well. When I looked I could find no guidance for non community property states. As far as I know, you can split up as you like.MechEngOSU wrote: ↑Sun Dec 05, 2021 9:22 amWe aren't in a community prop state, so that might be different too.
-
- Posts: 2407
- Joined: Sat Jun 27, 2020 4:05 pm
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
I got two conflicting answers. Any authoritative sources?
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
No authoritative source, just relating from experience the policy of the IRS. It's possible that certain states may have a law that provides a spouse's ownership or interest in a joint spouse account that differs from 50/50. If the spouses allocated on their tax returns in accordance with the state's provisions, that argument could be presented to the IRS, which the IRS may or may not accept. I can't think of any legal basis for the spouses allocating the gains or losses between them in any abitrary amounts they choose.AnEngineer wrote: ↑Sun Dec 05, 2021 8:43 pm I got two conflicting answers. Any authoritative sources?
-
- Posts: 2407
- Joined: Sat Jun 27, 2020 4:05 pm
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
How do you know that's the policy of the IRS? I could not find any guidance for non community property states.MarkNYC wrote: ↑Sun Dec 05, 2021 8:53 pmNo authoritative source, just relating from experience the policy of the IRS. It's possible that certain states may have a law that provides a spouse's ownership or interest in a joint spouse account that differs from 50/50. If the spouses allocated on their tax returns in accordance with the state's provisions, that argument could be presented to the IRS, which the IRS may or may not accept. I can't think of any legal basis for the spouses allocating the gains or losses between them in any abitrary amounts they choose.AnEngineer wrote: ↑Sun Dec 05, 2021 8:43 pm I got two conflicting answers. Any authoritative sources?
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
Based on professional experience.AnEngineer wrote: ↑Sun Dec 05, 2021 9:09 pmHow do you know that's the policy of the IRS?MarkNYC wrote: ↑Sun Dec 05, 2021 8:53 pmNo authoritative source, just relating from experience the policy of the IRS. It's possible that certain states may have a law that provides a spouse's ownership or interest in a joint spouse account that differs from 50/50. If the spouses allocated on their tax returns in accordance with the state's provisions, that argument could be presented to the IRS, which the IRS may or may not accept. I can't think of any legal basis for the spouses allocating the gains or losses between them in any abitrary amounts they choose.AnEngineer wrote: ↑Sun Dec 05, 2021 8:43 pm I got two conflicting answers. Any authoritative sources?
-
- Posts: 2407
- Joined: Sat Jun 27, 2020 4:05 pm
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
I mean in a very literal sense. Did they tell you, did you read it? Or you're not sure because it's just part of your professional knowledge.MarkNYC wrote: ↑Sun Dec 05, 2021 10:03 pmBased on professional experience.AnEngineer wrote: ↑Sun Dec 05, 2021 9:09 pmHow do you know that's the policy of the IRS?MarkNYC wrote: ↑Sun Dec 05, 2021 8:53 pmNo authoritative source, just relating from experience the policy of the IRS. It's possible that certain states may have a law that provides a spouse's ownership or interest in a joint spouse account that differs from 50/50. If the spouses allocated on their tax returns in accordance with the state's provisions, that argument could be presented to the IRS, which the IRS may or may not accept. I can't think of any legal basis for the spouses allocating the gains or losses between them in any abitrary amounts they choose.AnEngineer wrote: ↑Sun Dec 05, 2021 8:43 pm I got two conflicting answers. Any authoritative sources?
Re: Does filing taxes "Married Filing Separately" make sense in our situation?
A couple of audits from years ago. I don't recall the specifics.AnEngineer wrote: ↑Sun Dec 05, 2021 10:07 pmI mean in a very literal sense. Did they tell you, did you read it? Or you're not sure because it's just part of your professional knowledge.MarkNYC wrote: ↑Sun Dec 05, 2021 10:03 pmBased on professional experience.AnEngineer wrote: ↑Sun Dec 05, 2021 9:09 pmHow do you know that's the policy of the IRS?MarkNYC wrote: ↑Sun Dec 05, 2021 8:53 pmNo authoritative source, just relating from experience the policy of the IRS. It's possible that certain states may have a law that provides a spouse's ownership or interest in a joint spouse account that differs from 50/50. If the spouses allocated on their tax returns in accordance with the state's provisions, that argument could be presented to the IRS, which the IRS may or may not accept. I can't think of any legal basis for the spouses allocating the gains or losses between them in any abitrary amounts they choose.AnEngineer wrote: ↑Sun Dec 05, 2021 8:43 pm I got two conflicting answers. Any authoritative sources?