Tax time is never fun, and if it’s your first time filing your taxes after getting married, be prepared for a few more headaches. The biggest decision you will have to make in regards to taxes is: should you file your taxes jointly or separately? There are benefits and drawbacks associated with each option. Let’s take a look at the pros and cons of each.
If you file as “married filing separately”, you will not receive the marriage tax credit. Also, if you have paid student loan interest, you cannot deduct any of that interest if you file separately (if you file jointly, you can deduct up to $2,500 in eligible student loan interest that you paid).
However, there are a few potential benefits of filing separately. If you make a lot more money than your spouse does (or vice versa), filing separately may be best. If you file together, your incomes will be combined. If you file separately, the person who makes less money will likely receive larger tax benefits.
Another reason to file separately is if you are on an income-based repayment (IBR) plan for your student loans. You can be on IBR regardless of whether you file separately or jointly. However, if you file jointly, your spouse’s income will be considered when your loan servicer determines how much your monthly student loan payments will be on an income-based plan.
(Note: I generally do not recommend income-based repayment. Your monthly payments will be lower, but you will pay your loans off over 20-25 years instead of 10, which means that you will pay MUCH more in interest over time. However, IBR is good to have as an option in case something unexpected comes up – such as being fired or laid off from your job and temporarily having no income. My husband and I have both been on IBR during brief periods – a couple months – of unemployment. This allowed us to stop making payments on our student loans when we had no income. Once we found new jobs, we immediately switched back to a standard 10 year repayment plan.)
If you file jointly, you will receive a marriage tax credit and you can deduct up to $2,500 in eligible student loan interest that you both paid during the year. For my husband and me, filing jointly made a huge impact on our situation. Because we were able to deduct the student loan interest (which we couldn’t do if we filed separately), we received a tax return instead of owing taxes (which would’ve happened if we couldn’t deduct the interest).
What should you do?
If you still aren’t sure whether you should file jointly or separately, I recommend trying out both. It will be time-consuming, but it will be worth it. First, try filing your taxes separately (if you are using a program, do not click “submit” or pay for anything). Get to the point where it shows you how much you owe or will receive, write it down, and then start over.
Now, try filing together and see what happens. If filing together gives you the biggest return (or lowest amount owed), click “submit” and file your taxes together. If filing separately gave the two of you the bigger payout, start over and file separately.
This is what my husband and I did the first time we filed our taxes together. It was a lengthy process, but it was worth it to ensure that we received the biggest return possible.
What do you find most frustrating or confusing about filing taxes?
**This post is part of Financially Savvy Saturdays.