When is it better to file a ‘married filing separately’ tax return?

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Q. My income is much more than my wife’s, mostly due to my higher required minimum distributions (RMDs), so we don’t qualify for the pension exclusion. If we filed “married filing separately,” she could qualify for the exclusion. How can we decide the best way to file? Would we get penalized by higher rates, especially on the federal return?
— Overtaxed

A. It’s a great question.

We’d all like to pay less tax, right?

To determine whether a married couple filing separate income tax returns would achieve a lower overall tax, you would calculate the joint tax liability compared with the sum of the separate income tax liabilities, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Eatontown.

For the New Jersey pension exclusion, as you suggested, there’s a $100,000 gross income limit to qualify for the exclusion, Becourtney said. The $100,000 gross income limit is a cliff. If the taxpayer exceeds it, they become ineligible for any pension exclusion.

If you do qualify for the exclusion, for 2018, you can exclude a maximum of $60,000 for a joint filer versus $30,000 for a married filing separately filer.

“Presumably, your wife has retirement distribution income of her own and her total gross income if filing separately would not exceed $100,000, allowing for use of the pension exclusion whereby on a joint basis you are likely ineligible to claim the pension exclusion,” Becourtney said. “If that is the case, it could very well be that filing separately will achieve a lower overall tax.”

To see if this is the best option for you, you’re simply going to have to run the numbers and do the math to see how it all adds up under each scenario.

If you decide to file separately for 2018 and made joint estimated tax payments, you will want to allocate them in a fashion that best suits you and minimizes or avoids any penalties from being incurred, he said.

“The IRS and state computer systems will record the payments under the Social Security number of the first spouse listed on the payment vouchers,” Becourtney said. “Be sure to attach a schedule or footnote to the tax returns explaining how the payments were split between the two separate income tax returns if indeed that takes place.”

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This story was originally published on April 9, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.