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File joint or separate? Tally it both ways

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in Small Business Tax

If you're like most married taxpayers, you'll sit down to your 1040 this year and dutifully check off the "Married filing jointly" box without a moment's thought.

Strategy: Don't assume you should file jointly every year. Although filing a joint return typically lowers your overall tax bill, even with the marriage penalty impact, it's not automatic.

In particular, a married couple can trim their overall taxes by filing separate returns if one spouse experiences an unusually large proportion of the couple's medical expenses, miscellaneous expenses or casualty losses. And some file separately to avoid joint liability.

For those reasons, it's wise to calculate your 2003 tax liability using both joint status and married-filing-separate status.

Example: Running the numbers. Let's say you earned $90,000 in 2003 and your spouse earned $10,000, totaling $100,000 for the year.

You always file a joint return and don't claim any deduction for medical or dental expenses. That's not unusual; only 5 percent of Americans deduct their medical costs. Reason: Taxpayers can start writing off medical expenses only once those expenses reach 7.5 percent of their adjusted gross income (AGI).

But suppose your spouse required expensive dental work last year and incurred $6,500 worth of unreimbursed medical and dental expenses. In comparison, your unreimbursed medical expenses totaled only $900 in 2003.

Filing jointly: If you file a joint return as usual, you'd gain no tax benefit from your spouse's medical expenses. That's because your combined medical and dental expenses of $7,400 don't exceed 7.5 percent of your AGI.

Filing separately: Now let's see what happens if you file separate tax returns for 2003. In that case, your spouse could earn a medical expense deduction because of her lower income. In fact, the deduction would reach a whopping $5,750 ($6,500 in expenses minus $750 [7.5 percent of $10,000]).

Other pros/cons of filing separately

Filing separately often comes with a price: Married-filing-separate taxpayers can't claim certain tax benefits, such as the dependent care or education credits. Also, filing separately on the federal level can affect your state income tax return.

The good news: Filing separately can help you avoid the 3 percent reduction on itemized deductions and the personal exemption phaseout.

A joint AGI exceeding $139,500 reduces certain itemized deductions on your 2003 return. Personal exemptions begin to phase out when your joint AGI hits $209,250. When spouses file separately, they can cut those figures in half.

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