The Difference Between Married Filing Separately vs Married Jointly

In this video, the advisors discuss whether it’s better for married couples to file their taxes jointly or separately. They provide an analysis based on a hypothetical couple with one spouse earning $500,000 and the other earning $100,000.

When they run the numbers for filing separately, they point out that each spouse can only claim half of the standard deduction, resulting in higher taxable incomes for both. This leads to a higher tax rate for the spouse with the $500,000 income.

In contrast, when filing jointly, the couple can claim the full standard deduction, resulting in a lower combined taxable income. This allows them to avoid the highest tax bracket and ultimately results in a lower overall federal tax bill.

The advisors highlight that there’s a significant tax savings of over $13,000 when filing jointly in this scenario.

However, they also note that there can be situations where a couple may choose to file separately. For example, if one spouse has a substantial student loan balance and is on an income-driven repayment plan, filing separately may keep their student loan payments lower, potentially saving them more money than the tax savings from filing jointly.

They emphasize that the decision between filing jointly or separately should consider both tax implications and other financial factors, especially if student loans are a significant consideration.

Video Transcript

In today’s video, we are going to discuss whether it is best to file taxes jointly or married filing separately for married couples. Some considerations of why this would be considered is if one spouse has a student loan balance that’s on an income -driven repayment plan, the other spouse does not.

Several other considerations for clients that may file separately versus jointly. We are going to today go through some examples and potentially what some tax savings would be if you file jointly versus separately. Ben, take us through the analysis. The analysis we ran was looking at a household with a combined income of $600 ,000, really with spouse one making $500 ,000 and spouse two making $100 ,000.

We ran two separate tax analysis. The first one was if they filed jointly and then the second one was if they filed separately. We are going to break down the numbers right now. Assuming that they file separately, we have spouse one’s income at $500 ,000 and spouse two’s income at $100 ,000.

Big takeaways here is that the standard deduction, again, we have the option of choosing the standard deduction or itemizing for simplicity’s sake. We are just going to assume that this couple is going to be using the standard deduction. You only have half of the standard deduction if you file separately than you would if you and your spouse filed jointly.

So, spouse one, again, $500 ,000 of income. You can only take $12 ,950 of a standard deduction that leaves your taxable income at about $487. Same calculation for spouse two, $100 ,000 of income, that same standard deduction down to $87.

So, really the big takeaway here from Mary filing separately is that the spouse with $500 ,000 of income, their income is going to get hit at a pretty large chunk at 37%. Again, our tax system is progressive, so there’s going to be some taxes at 10%, 12%, 24%, 22%, 24%, 32%, 35%.

If you scroll over to the Mary filing jointly, that $500 ,000 and $100 ,000, that’s their combined AGI, so they’re combined AGI, $600 ,000. They’re able to take that full standard deduction of $25 ,900, which leaves their taxable income at $574. Key here is, again, $574 ,000 if you look at our tax brackets.

That avoids that 37% tax rate, which is our highest marginal tax rate. Estimating our federal tax, if they file jointly, they’d owe about $148 ,000 in federal tax, and if they filed separately, they’d owe about $162 ,000. So total federal tax savings, if they decide to file jointly, is $13 ,600.

Ben, thank you for providing such a detailed analysis here. So why would anyone ever married filing? Why would anyone ever file married filing separately versus married filing jointly when there’s a $13 ,000 plus savings on the table?

The answer to that would be, for example, if the $100 ,000 income earner in this example has a large amount of student loan balance and they want to keep that payment as low as possible, pay as you earn, or an income -based repayment, for example, if they file separately, it would just be based upon the $100 ,000 income earners, and the payment directionally would be somewhere in the range of $500, $800 a month versus if that other spouse’s income comes into play.

Some programs, they’d be thrown out of completely because the income -based repayment in some circumstances gets capital standard repayment, so the student loan payment would go up to thousands of dollars per month, and if they’re on a forgiveness plan, taking a student loan payment from $500 to, let’s say, $4 ,000 a month, that’s a $3 ,500 a month difference, $42 ,000 per year, that’s a much larger out -of -pocket cost than a $13 ,000 tax savings.

This is really the biggest reason why someone would choose to pay a larger amount of taxes, is to then thereby save a much, much larger amount in a student loan payment. For clients that do not have student loans, most of the time it is a no -brainer, two -file, married filing jointly.

In certain circumstances, it’s going to be a break -even. For example, both spouses make $300 ,000 based upon where the tax brackets follow. Married filing jointly and married filing separately is almost identical. Where there’s a huge savings is when there’s a big differential, when one spouse makes a lot and one spouse makes a less, married filing jointly is going to always be the way to go under the current tax law.

Ben, thanks again, and thank you for watching. Look forward to catching you in the next video.

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