06 Apr If we file separately, what happens to joint account interest?

Q. My wife and I are both older than 65 and we each receive a federal civil service pension. My pension is higher than the $100,000 cutoff for the pension exclusion. My wife’s pension is $40,000 so we plan to file separately this year. How is our interest income divided between our two returns? We have some Certificates of Deposit (CDs) in each of our names and some are joint. We also have savings bonds in her name but I actually bought them. What do we do?
— Married taxpayer

A. This is a common question for those who want to switch their filing status.

For starters, New Jersey tax law says you must use the same filing status on your New Jersey tax return as you do for federal purposes.

“If you want to file separately for New Jersey, you must also file separately for the IRS,” said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown. “The benefit of filing separately for the state might be negatively offset by higher federal taxes.”

For 2019, those married filing jointly can exclude $80,000 of income, married taxpayers who file separately can exclude $40,000 of income, and singles can exclude $60,000.

For the 2020 tax year, if you are married and filing jointly, you can exclude $100,000 of income, those married filing separately can exclude $50,000 and singles can exclude $75,000 of income.

You must also be 62 or older, or because of a disability, you must be receiving Social Security benefits, to qualify.

As you said, you won’t qualify for the exclusion if your income is more than $100,000.

“If you are over by as little as one dollar, your exclusion is not phased out, it is simply gone,” Kiely said. “Also remember your Social Security income is not counted because New Jersey doesn’t tax Social Security.”

About interest and dividends, you’re talking about three kinds of accounts: yours, hers and yours together.

“Kiely said bank accounts, CDs and brokerage accounts in your name alone belong to you for tax purposes. Same for the ones in your wife’s name — they belong to her for tax purposes.

“The joint accounts belong to both of you equally, so joint account income should be split equally,” he said. “These rules apply to both your federal tax returns as well as your state return.”

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This story was originally published on April 6, 2020.

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.