Question: “We are a married couple with return-to-office mandates. This leads to a number of issues as our home address is in Illinois but our working address is in North Carolina. We’re renting in Illinois, have HSAs at both employers and a 401(k) solely at my wife’s employer. I haven’t reached the minimum time required to have a 401(k) at my own employer yet. Both of our parents are aging; they’re in their 70s. We’ve been married for three years but are open to learning if married filing separately makes more sense.
We just started buying stocks at my wife’s job and she has a 401(k) loan balance of $29K at 10.25%. I was recently diagnosed with cancer and have been on official leave. We’d like to make smart decisions about our future and clean up our financial profile to prepare for aging. As a bank employee, we have discounted options but the trust isn’t formidable. What’s the best way to move forward given our wide array of challenges?”
Answer: Often for couples, married filing jointly is the most beneficial tax filing status, pros tell us, but it is dependent on the couple. And as for how to move forward, you might want to hire a tax preparer and/or a financial planner to map out your future. You can use this free tool from our ad partner SmartAsset to get matched with a financial planner, as well as sites like CFP Board and NAPFA.
But first, let’s dive into the tax issue. Generally speaking, couples that file jointly benefit from lower tax rates compared to those filing separately. “They can make more money and be taxed less when filing married filing jointly,” says Lisa Greene-Lewis, CPA, TurboTax spokesperson and tax expert.
Adds Anne Nellen, CPA and professor at San Jose State University’s graduate tax program: “For most couples, filing jointly is best so they don’t lose deductions or credits as several are only available to a married person if they file jointly. This includes the Earned Income Tax Credit and Adoption Credit as well as deductions new for 2025 [such as] tip income deduction, overtime compensation deduction and enhanced senior deduction,” says Nellen.
In other words, the most compelling reason to file jointly is that there are more tax breaks. “Many tax credits and deductions and education tax credits can only be claimed if you file as married filing jointly and not when married filing separately,” says Greene-Lewis. Specifically, she says the Earned Income Tax Credit up to $8,046 for a family with three kids and Child and Dependent Care Tax Credit up to $1,050 for one child and up to $2,100 for two or more kids happens when filing jointly. “Being able to earn more money while being taxed less and being able to claim more income-based credits and deductions compared to married filing separately will give you a more favorable tax outcome overall compared to married filing separately known as the marriage bonus,” says Greene-Lewis.
Keep in mind that Nellen says filing jointly is typically easier as all income, deductions and tax withholdings are claimed on a single return. “If the couple lives in a community property state and files separately, they need to be sure to split all of their community income, which often is all of their wages and other income unless one spouse has kept separate property and has income from it. See Form 8958,” says Nellen.
That said, filing separately can make sense if a couple is considering divorce or one spouse is concerned about their knowledge of the other spouse’s income. “Depending on income level, some state matters might warrant filing separately. If a couple is concerned about reporting of income of both spouses, unusual circumstances such as one having high medical expenses or other considerations, they should discuss them with a tax adviser knowledgeable about federal and state tax matters for married couples,” says Nellen.
Ultimately, the tax code penalizes married filing separately taxpayers in many respects due to concerns about the possible ability to manipulate the tax system by filing separately, says Mark Luscombe, principal analyst for Wolters Kluwer’s Tax and Accounting Division North America. “There is a penalty for married filing separately in some of the income tax brackets. There is a very low return filing threshold. Several tax breaks are not available or have lower income phase-outs for married filing separately. Rules in community property states can also alter any advantages of married filing separately, however, neither Illinois nor North Carolina is a community property state,” says Luscombe.
What type of financial professional can help you?
Rob Burnette, investment adviser representative and professional tax preparer at Outlook Financial Center, says you need the services of a fiduciary financial planner, not just an adviser, who has the requisite experience for incorporating in a plan all the issues you’re facing. “State taxes are the first concern since both states have income taxes that are higher than average. Filing status can affect the decision on joint or separate married filing for state taxes,” says Burnette.
Most professional tax preparers can run a report showing the impact of joint versus separate filing status, says Burnette. “The objective is to get the best result for the household which may cause one spouse to write a check and the other to get a refund. This is a decision that is made annually, so you aren’t locked in one way or the other,” says Burnette.
In addition, having a financial adviser, even if it’s just someone you work with to create a one-time plan, who can coordinate with your tax preparer makes for a much more thorough experience. Working with a fee-only fiduciary planner ensures that they’re only paid by you, and not earning commissions which can create conflicts of interest.
Many CFPs work on an hourly or project basis and can be retained for $200 to $500 per hour or between $1,500 and $7,500 per project, depending on the scope of work. Financial planning can be costly, but fortunately, several organizations offer pro bono financial advising for cancer patients including the Financial Planning Association and the Foundation for Financial Planning. You can use this free tool from our ad partner SmartAsset to get matched with a financial planner, as well as sites like CFP Board and NAPFA.
Have an issue with your financial planner or looking for a new one? Email questions or concerns to picks@marketwatch.com.
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