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A quirk in the rules for qualifying for new unemployment tax relief may cause some married couples to question whether they need to file separate returns, even though they typically file jointly.
The short answer: Separate filing can make sense in some cases, especially when each spouse can benefit from 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 be the most cost effective for most families.
Households should use the route that offers the lowest total tax bill.
“For the most part, it makes sense to file jointly from a purely tax perspective,” said Oscar Vives Ortiz, a Tampa-based accountant and financial planner. “The numbers are such that you get a little break.”
“But I always say run the numbers and see,” he added.
The American Rescue Plan waives federal tax on up to $ 10,200 in unemployment benefits collected last year.
The tax benefit applies per person, which means that a married couple can exclude a maximum of $ 20,400 from income tax.
However, taxpayers cannot get the break if their modified adjusted gross income (excluding unemployment benefits) is $ 150,000 or more. The limit is the same regardless of filing status as single or married.
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The $ 150,000 limit would prevent each spouse of a higher-income couple – both of whom lost their jobs in 2020 and who typically file a joint tax return – from getting the tax break.
These couples, who are likely in the 22% or 24% federal tax bracket, could lose $ 4,500 to $ 5,000 in tax savings.
But filing separate returns could put each spouse under the $ 150,000 income limit and make each eligible.
However, there are caveats that could make a joint return more financially beneficial.
According to Lisa Greene-Lewis, CPA at TurboTax, filing separate returns can prevent couples from getting some important tax credits and deductions.
The child and dependent care credit is worth up to $ 3,000 per eligible person and $ 6,000 for two or more persons. The deduction of interest paid on qualifying student loans can be up to $ 2,500.
Unemployment tax relief would have to yield a greater financial benefit to be meaningful.
This would tend to be more likely for couples in which each spouse received ample unemployment benefits in 2020, tax experts say. They would receive tax relief on or near the maximum amount ($ 10,200 in benefits).
This can apply to a good number of couples. About 40 million people received benefits last year and the average person received $ 14,000.
“If you’re not at the max level, figure out the numbers and see where you are,” Ortiz said.
It may also be a good idea to file a separate return if one or both spouses had significant medical expenses in 2020 and they detail their tax return, he said.
“Sometimes in the case of medical bills, there’s a little game to play,” 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 return can make it easier to go over this limit and get tax relief for more medical expenses.
For example, a taxpayer with income of $ 75,000 might get a tax deduction for all expenses over $ 5,625. But a married couple with a joint income of $ 150,000 cannot begin receiving tax relief until medical expenses exceed $ 11,250.
IRS allows personal protective equipment to prevent the spread of Covid-19 (such as masks, hand sanitizer, and wipes) to count as an eligible medical cost, agency announcement Friday.
If one of the spouses details their tax return, the other must also do so (instead of benefiting from the standard deduction).