$ 10,200 Unemployed Tax Break: Married couples should file separate tax returns here
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A quirk in the eligibility rules for a new unemployment tax break may lead some married couples to wonder whether they should file separate declarations, even if they usually file together.
The short answer: in some cases, filing separately may make sense, especially if each spouse can get the maximum tax break. This strategy only applies to couples whose joint income is too high to get the break.
Even so, filing a joint return will likely still bring the greatest profit for the majority of families.
Households should use the route that has the lowest overall tax burden.
“For the most part, it makes sense to file together from a purely tax perspective,” said Oscar Vives Ortiz, auditor and financial planner based in Tampa. “The numbers are such that you get a little break.”
“But I always say, run the numbers and see,” he added.
$ 10,200 unemployment tax break
The American Rescue Plan waives federal taxes on up to $ 10,200 in unemployment benefits collected over the past year.
The tax benefit is per person – that is, a couple can exclude a maximum of $ 20,400 from income tax.
However, taxpayers cannot take a break if their modified adjusted gross income (excluding unemployment benefits) is $ 150,000 or more. The limit is the same regardless of the registration status such as single or married.
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The $ 150,000 limit would exclude any spouse of a higher-income couple – who both lost their jobs in 2020 and typically file a joint tax return – from the tax break.
Such couples, who are likely to fall into the 22% or 24% tax bracket, could lose $ 4,500 to $ 5,000 in tax savings.
However, filing separate returns could result in each spouse falling below the $ 150,000 income limit and each spouse eligible.
If submitted separately, it makes sense
However, there are caveats that could make a joint return more financially beneficial.
One major drawback, according to Lisa Greene-Lewis, CPA at TurboTax, is that filing separate tax returns can exclude couples from obtaining certain valuable tax credits and deductions.
For example, the child and care-dependent loan and student loan interest deduction are only available to married couples filing a joint tax return, not separate returns.
Child and Dependent Credit balances are up to $ 3,000 per person for one eligible person and $ 6,000 for two or more people. The deduction for interest on qualifying student loans is up to $ 2,500.
The unemployed tax break would have to bring a greater financial benefit to make sense.
According to tax experts, this is more likely to be the case with couples where each spouse received ample unemployment benefits in 2020. You would get a tax break for the maximum amount ($ 10,200 in benefits) or close to it.
This can apply to a reasonable number of couples. About 40 million people have earned benefits in the past year, and the average person received $ 14,000.
“If you’re not at the max level, put in the numbers and see where you stand,” Ortiz said.
It might also make sense to file a separate tax return if one or both spouses had high medical expenses in 2020 and are listing their tax returns, he said.
“Sometimes there is a little game about medical bills,” he said.
Taxpayers can deduct medical expenses incurred during the year, but only those that exceed 7.5% of their adjusted gross income.
Filing a separate tax return can make it easier to cross that limit – and get a tax break on more medical expenses.
For example, a taxpayer with an income of $ 75,000 could receive a tax deduction for any expenses that violate $ 5,625. However, a married couple with a combined income of $ 150,000 cannot receive a tax break until medical expenses exceed $ 11,250.
The IRS allows personal protective equipment to prevent the spread of Covid-19 (such as masks, hand sanitisers, and wipes) to count as a qualifying medical expense, the agency said on Friday.
If one spouse lists their tax return, the other must do the same (instead of making the standard deduction).