The Pros and Cons to Filing Taxes Jointly in California
For married couples, tax season brings about an important family decision to make: filing taxes jointly vs. separately. While filing taxes jointly in California can often help couples simplify their tax preparation and potentially save money, it’s not always a clear-cut decision.
Filing taxes jointly vs. separately can depend on a number of factors, such as the income of each spouse and how that income affects the tax brackets they fall into. Choosing your filing status can also include considerations such as tax deductions, for which sometimes there are advantages to filing jointly and sometimes there are advantages to filing separately.
Keep in mind that although the decision to file separately may seem counterintuitive for those who intend to stay married and for those who share finances, there can be situations where the couple saves money by filing separately.
To decide which filing status works best for your family, consider factors such as the following:
Income Tax Rates
One advantage of filing taxes jointly in California can be that tax brackets have higher income ranges for both federal and state taxes, which can help some couples reduce their effective tax rate.
For example, for California state taxes, if your combined adjusted gross income (AGI) is $500,000, you would primarily fall into the 9.3% tax bracket (on income between $132,591 and $677,278). If you used the married filing separately status, however, and your individual AGI is $500,000 while your spouse did not earn income, that would mean some of your income would fall into the 11.3% bracket for single/married filing separately filers (on income between $406,365 and $677,275).
Standard Deductions
For federal taxes, the 2022 standard deduction is $12,950 for those who are married filing separately, and it doubles to $25,900 for those who are married filing jointly. In some cases, using the higher standard deduction could reduce your taxes.
For example, if one spouse works part-time and earns $10,000 per year, the standard deduction for those who are married filing separately would be more than their income, so they wouldn’t be able to take full advantage of the deduction. However, by filing jointly, more of the couple’s combined income can be offset by the larger standard deduction.
Tax Credits
Certain types of tax credits and deductions such as the child tax credit can also play a role when deciding on filing taxes jointly. The child tax credit gets phased out at an AGI of $200,000, but that doubles to $400,000 for those who are married filing jointly.
The higher limit may help some couples claim the full benefits of this tax credit, especially if one spouse has income above $200,000 and the other has no income and would not benefit from claiming the credit on their individual tax return.
Health Care Expenses
While filing taxes jointly often provides higher income limits for tax credits and deductions, sometimes it works out better to deduct expenses when using the married filing separately status.
For example, you can deduct health care expenses that exceed 7.5% of your AGI. Thus, filing jointly if both you and your spouse have income would raise your AGI, which could make it harder to cross that 7.5% threshold. Instead, if you use the married filing separately status to lower your AGI, you may be able to deduct more health care expenses.
Filing Goals
Aside from the monetary considerations of filing taxes jointly in California, you should also consider your filing goals. If you want to simplify your tax return, filing taxes jointly could be the way to go, since you would have only one return instead of two. However, if you have other goals such as keeping your finances as separate as possible, it might be in the best interest of you and your spouse to file separately.
These are just a few of the factors that go into choosing your filing status. Looking at the different tax brackets, credits, deductions, etc., with a financial advisor or tax professional can help you determine whether filing jointly vs. separately would work best for you and your spouse. Your professional can also help you start thinking ahead to optimize your 2023 tax planning.
Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Roseville and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.