The tax filing deadline for 2023 tax returns is April 15 this year. If you need more time, you can file for an extension until October 15. In either case, once your 2023 tax return has been successfully filed with the IRS, there may still be some issues to bear in mind. Here are three considerations.

1. Waiting for your refund? You can check on it

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get your refund status” to find out about yours. You’ll need your Social Security number or Individual Taxpayer Identification Number, filing status, and the exact refund amount.

2. Throwing away tax records

You should hold on to tax records related to your return for as long as the IRS can audit your return or assess additional taxes. The statute of limitations is generally three years after you file your return.

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should keep certain tax-related records longer. For example, keep your actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

What about your retirement account paperwork? Keep records associated with a retirement account until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

3. Filing an amended return if you failed to report something

In general, you can file an amended tax return on Form 1040-X and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2023 tax return that you file on April 15, 2024, you can generally file an amended return until April 15, 2027.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

We’re here all year

Contact us if you have questions about tax record retention, your refund or filing an amended return. We’re not just available at tax filing time. You can reach us year-round.

The April 15 tax filing deadline is right around the corner. However, you might not be ready to file. Sometimes, it’s not possible to gather your tax information by the due date. If you need more time, you should file for an extension on Form 4868.

An extension will give you until October 15 to file and allows you to avoid “failure-to-file” penalties. However, it only provides extra time to file, not to pay. Whatever tax you estimate is owed must still be sent by April 15, or you’ll incur penalties — and as you’ll see below, they can be steep.

Two different penalties

Separate penalties apply for failing to pay and failing to file. The failure-to-pay penalty runs at 0.5% for each month (or part of a month) the payment is late. For example, if payment is due April 15 and is made May 25, the penalty is 1% (0.5% times 2 months or partial months). The maximum penalty is 25%.

The failure-to-pay penalty is based on the amount shown as due on the return (less amounts paid through withholding or estimated payments), even if the actual tax bill turns out to be higher. On the other hand, if the actual tax bill turns out to be less, the penalty is based on the lower amount.

The failure-to-file penalty runs at the more severe rate of 5% per month (or partial month) of lateness to a maximum 25%. If you file for an extension on Form 4868, you’re not filing late unless you miss the extended due date. However, as mentioned earlier, a filing extension doesn’t apply to your responsibility for payment.

If the 0.5% failure-to-pay penalty and the failure-to-file penalty both apply, the failure-to-file penalty drops to 4.5% per month (or part) so the combined penalty is 5%. The maximum combined penalty for the first five months is 25%. Thereafter, the failure-to-pay penalty can continue at 0.5% per month for 45 more months (an additional 22.5%). Thus, the combined penalties can reach a total of 47.5% over time.

The failure-to-file penalty is also more severe because it’s based on the amount required to be shown on the return, and not just the amount shown as due. (Credit is given for amounts paid through withholding or estimated payments. If no amount is owed, there’s no penalty for late filing.) For example, if a return is filed three months late showing $5,000 owed (after payment credits), the combined penalties would be 15%, which equals $750. If the actual liability is later determined to be an additional $1,000, the failure-to-file penalty (4.5% × 3 = 13.5%) would also apply to this amount for an additional $135 in penalties.

A minimum failure-to-file penalty also applies if a return is filed more than 60 days late. This minimum penalty is the lesser of $485 (for returns due after December 31, 2023) or the amount of tax required to be shown on the return.

Exemption in certain cases 

Both penalties may be excused by the IRS if lateness is due to “reasonable cause” such as death or serious illness in the immediate family.

Interest is assessed at a fluctuating rate announced by the government apart from and in addition to the above penalties. Furthermore, in particularly abusive situations involving a fraudulent failure to file, the late filing penalty can jump to 15% per month, with a 75% maximum.

If you have questions about filing Form 4868 or IRS penalties, contact us.

If you have a tax-favored retirement account, including a traditional IRA, you’ll become exposed to the federal income tax required minimum distribution (RMD) rules after reaching a certain age. If you inherit a tax-favored retirement account, including a traditional or Roth IRA, you’ll also have to deal with these rules.

Specifically, you’ll have to: 1) take annual withdrawals from the accounts and pay the resulting income tax and/or 2) reduce the balance in your inherited Roth IRA sooner than you might like.

Let’s take a look at the current rules after some recent tax-law changes.

RMD basics 

The RMD rules require affected individuals to take annual withdrawals from tax-favored accounts. Except for RMDs that meet the definition of tax-free Roth IRA distributions, RMDs will generally trigger a federal income tax bill (and maybe a state tax bill).

Under a favorable exception, when you’re the original account owner of a Roth IRA, you’re exempt from the RMD rules during your lifetime. But if you inherit a Roth IRA, the RMD rules for inherited IRAs come into play.

A later starting age

The SECURE 2.0 law was enacted in 2022. Previously, you generally had to start taking RMDs for the calendar year during which you turned age 72. However, you could decide to take your initial RMD until April 1 of the year after the year you turned 72.

SECURE 2.0 raised the starting age for RMDs to 73 for account owners who turn age 72 in 2023 to 2032. So, if you attained age 72 in 2023, you’ll reach age 73 in 2024, and your initial RMD will be for calendar 2024. You must take that initial RMD by April 1, 2025, or face a penalty for failure to follow the RMD rules. The tax-smart strategy is to take your initial RMD, which will be for calendar year 2024, before the end of 2024 instead of in 2025 (by the April 1, 2025, absolute deadline). Then, take your second RMD, which will be for calendar year 2025, by Dec. 31, 2025. That way, you avoid having to take two RMDs in 2025 with the resulting double tax hit in that year.

A reduced penalty

If you don’t withdraw at least the RMD amount for the year, the IRS can assess an expensive penalty on the shortfall. Before SECURE 2.0, if you failed to take your RMD for the calendar year in question, the IRS could impose a 50% penalty on the shortfall. SECURE 2.0 reduced the penalty from 50% to 25%, or 10% if you withdraw the shortfall within a “correction window.”

Controversial 10-year liquidation rule 

A change included in the original SECURE Act (which became law in 2019) requires most non-spouse IRA and retirement plan account beneficiaries to empty inherited accounts within 10 years after the account owner’s death. If they don’t, they face the penalty for failure to comply with the RMD rules.

According to IRS proposed regulations issued in 2022, beneficiaries who are subject to the original SECURE Act’s 10-year account liquidation rule must take annual RMDs, calculated in the usual fashion — with the resulting income tax. Then, the inherited account must be emptied at the end of the 10-year period. According to this interpretation, you can’t simply wait 10 years and then drain the inherited account.

The IRS position on having to take annual RMDs during the 10-year period is debatable. Therefore, in Notice 2023-54, the IRS stated that the penalty for failure to follow the RMD rules wouldn’t be assessed against beneficiaries who are subject to the 10-year rule who didn’t take RMDs in 2023. It also stated that IRS intends to issue new final RMD regulations that won’t take effect until sometime in 2024 at the earliest.

Contact us about your situation

SECURE 2.0 includes some good RMD news. The original SECURE Act contained some bad RMD news for certain account beneficiaries in the form of the 10-year account liquidation rule. However, exactly how that rule is supposed to work is still TBD. Stay tuned for developments.

If your small business is strapped for cash (or likes to save money), you may find it beneficial to barter or trade for goods and services. Bartering isn’t new — it’s the oldest form of trade — but the internet has made it easier to engage in with other businesses.

However, if your business begins bartering, be aware that the fair market value of goods that you receive in these types of transactions is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.

Fair market value

Here are some examples of an exchange of services:

• A computer consultant agrees to offer tech support to an advertising agency in exchange for free advertising.
• An electrical contractor does repair work for a dentist in exchange for dental services.

In these cases, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence.

In addition, if services are exchanged for property, income is realized. For example:

• If a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory.
• If an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock.

Joining a club

Many businesses join barter clubs that facilitate barter exchanges. These clubs generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

In general, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year, and that each unit is redeemable for $2 in goods and services. In that year, you’ll have $5,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed on that income.

If you join a barter club, you’ll be asked to provide your Social Security number or Employer Identification Number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club is required to withhold tax from your bartering income at a 24% rate.

Tax reporting

By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.

Exchanging without exchanging money

By bartering, you can trade away excess inventory or provide services during slow times, all while hanging on to your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties involved. Contact us if you need assistance or would like more information.

Some people mistakenly believe that Social Security benefits are always free from federal income tax. Unfortunately, that’s often not the case. In fact, depending on how much overall income you have, up to 85% of your benefits could be hit with federal income tax.

While the truth about the federal income tax bite on Social Security benefits may be painful, it’s better to understand it. Here are the rules.

Calculate provisional income

The amount of Social Security benefits that must be reported as taxable income on your tax return depends on your “provisional income.” To arrive at provisional income, start with your adjusted gross income (AGI), which is the number that appears on Page 1, Line 11 of Form 1040. Then, subtract your Social Security benefits to arrive at your adjusted AGI for this purpose.

Next, take that adjusted AGI number and add the following:

1. 50% of Social Security benefits,
2. Any tax-free municipal bond interest income,
3. Any tax-free interest on U.S. Savings Bonds used to pay college expenses,
4. Any tax-free adoption assistance payments from your employer,
5. Any deduction for student loan interest, and
6. Any tax-free foreign earned income and housing allowances, and certain tax-free income from Puerto Rico or U.S. possessions.

The result is your provisional income.

Find your tax scenario

Once you know your provisional income, you can determine which of the following three scenarios you fall under.

Scenario 1: All benefits are tax-free

If your provisional income is $32,000 or less, and you file a joint return with your spouse, your Social Security benefits will be federal-income-tax-free. But you might owe state income tax.

If your provisional income is $25,000 or less, and you don’t file jointly, the general rule is that Social Security benefits are totally federal-income-tax-free. However, if you’re married and file separately from your spouse who lived with you at any time during the year, you must report up to 85% of your Social Security benefits as income unless your provisional income is zero or a negative number, which is unlikely.

Having federal-income-tax-free benefits is nice, but, as you can see, this favorable outcome is only allowed when provisional income is quite low.

Scenario 2: Up to 50% of your benefits are taxed

If your provisional income is between $32,001 and $44,000, and you file jointly with your spouse, up to 50% of your Social Security benefits must be reported as income on Form 1040.

If your provisional income is between $25,001 and $34,000, and you don’t file a joint return, up to 50% of your benefits must be reported as income.

Scenario 3: Up to 85% of your benefits are taxed

If your provisional income is above $44,000, and you file jointly with your spouse, you must report up to 85% of your Social Security benefits as income on Form 1040.

If your provisional income is above $34,000, and you don’t file a joint return, the general rule is that you must report up to 85% of your Social Security benefits as income.

As mentioned earlier, you also must report up to 85% of your benefits if you’re married and file separately from your spouse who lived with you at any time during the year — unless your provisional income is zero or a negative number.

Turn to us

This is only a very simplified explanation of how Social Security benefits are taxed. With the necessary information, we can precisely calculate the federal income tax, if any, on your Social Security benefits.

Unemployment has been holding steady recently at 3.7%. But there are still some people losing their jobs — particularly in certain industries including technology and media. If you’re laid off or terminated from employment, taxes are likely the last thing on your mind. However, there are tax implications due to your altered employment circumstances.

Depending on your situation, the tax aspects can be complex and require you to make decisions that may affect your tax bill for this year and for years to come. Be aware of these three areas.

1.Unemployment and payments from your former employer

Many people are surprised to find out that federal unemployment compensation is taxable. (Some states exempt unemployment comp from state tax.) In addition, payments from a former employer for any accumulated vacation or sick time are taxable. Although severance pay is also taxable and subject to federal income tax withholding, some elements of a severance package may get special treatment. For example:

• If you sell stock acquired by way of an incentive stock option (ISO), part or all of your gain may be taxed at lower long-term capital gain rates rather than at ordinary income tax rates, depending on whether you meet a special dual holding period.
• If you received — or will receive — what’s commonly referred to as a “golden parachute payment,” you may be subject to an excise tax equal to 20% of the portion of the payment that’s treated as an “excess parachute payment” under very complex rules, along with the excess parachute payment also being subject to ordinary income tax.
• The value of job placement assistance you receive from your former employer usually is tax-free. However, the assistance is taxable if you had a choice between receiving cash or outplacement help.

2.Health insurance costs

Under the COBRA rules, employers that offer group health coverage generally must provide continuation coverage to most terminated employees and their families. While the cost of COBRA coverage is usually expensive, the amount of any premium you pay for insurance that covers medical care is an eligible medical expense for tax purposes. That means it’s deductible if you itemize deductions and if your total medical expenses exceed 7.5% of your adjusted gross income.

If your former employer pays some of your medical coverage for a period of time after termination, you won’t be taxed on the value of the benefit.

3.Retirement plan balance

Employees whose employment is terminated may need tax planning help to determine the best option for amounts they’ve accumulated in retirement plans sponsored by former employers, such as a 401(k) plan. In many cases, a direct, tax-free rollover to an IRA is the best move. You may also choose to leave the account in your previous employer’s 401(k) plan (although the employer may elect to distribute the funds to you). Or, if you get a new job, you may want to transfer the money in the account with your former employer to your new employer’s 401(k) plan.

If you’re under age 59½, and make withdrawals from your former company’s plan or IRA to supplement missing income, you may owe an additional 10% penalty tax unless you qualify for an exception.

If a distribution from the retirement plan includes employer securities in a lump sum, the distribution is taxed under the lump-sum rules, except that “net unrealized appreciation” in the value of the stock isn’t taxed until the securities are sold or otherwise disposed of in a later transaction.

Further, any loans you’ve taken out from your former employer’s retirement plan, such as a 401(k)-plan loan, may be required to be repaid immediately, or within a specified period. If they aren’t, they may be treated as if the loan is in default. If the balance of the loan isn’t repaid within the required period, it will typically be treated as a taxable deemed distribution.

If you need assistance, contact us. We can help you navigate the best path forward during this transition period.

With the high cost of college, many parents begin saving with 529 plans when their children are babies. Contributions to these plans aren’t tax deductible, but they grow tax deferred. Earnings used to pay qualified education expenses can be withdrawn tax-free. However, earnings used for other purposes may be subject to income tax plus a 10% penalty.

What if you have a substantial balance in a 529 plan but your child doesn’t need all the money for college? Perhaps your child decided not to attend college or received a scholarship. Or maybe you saved for private college, but your child attended a lower-priced state university.

What should you do with unused funds? One option is to pay the tax and penalties and spend the money on whatever you wish. But there are more tax-efficient options, including a new 529-to-Roth IRA transfer.

Nuts and bolts

Beginning in 2024, you can transfer unused funds in a 529 plan to a Roth IRA for the same beneficiary, without tax or penalties. These rollovers are subject to several rules and limits:

• Transfers have a lifetime maximum of $35,000 per beneficiary.
• The 529 plan must have existed for at least 15 years.
• The rollover must be through a direct trustee-to-trustee transfer.
• Transferred funds can’t include contributions made within the preceding five years or earnings on those contributions.
• Transfers are subject to the annual limits on contributions to Roth IRAs (without regard to income limits).

For example, let’s say you opened a 529 plan for your son after he was born in 2001. When your son graduated from college in 2023, there was $30,000 left in the account. In 2024, under the new option, you can begin transferring funds into your son’s Roth IRA. Since the 529 plan was opened at least 15 years ago (and no contributions were made in the last five years), the only restriction on rollover is the annual Roth IRA contribution limit. Assuming your son hasn’t made any other IRA contributions for 2024, you can roll over up to $7,000 (if your son has at least that much earned income for the year).

If your son’s earned income for 2024 is less than $7,000, the amount eligible for a rollover will be reduced. For example, if he takes an unpaid internship and earns $4,000 during the year from a part-time job, the most you can roll over for the year is $4,000.

A 529-to-Roth IRA rollover is an appealing option to avoid tax and penalties on unused funds, while helping the beneficiaries start saving for retirement. Roth IRAs are a great savings vehicle for young people because they’ll enjoy tax-free withdrawals decades later.

Other options

Roth IRA rollovers aren’t the only option for avoiding tax and penalties on unused 529 plan funds. You can also change a plan’s beneficiary to another family member. Or you can use 529 plans for continuing education, certain trade schools, or even up to $10,000 per year of elementary through high school tuition. In addition, you can withdraw funds tax-free to pay down student loan debt, up to $10,000 per beneficiary.

It’s not unusual for parents to end up with unused 529 funds. Contact us if you have questions about the most tax-wise way to handle them.

A recent report shows that post-pandemic global business travel is going strong. The market reached $665.3 billion in 2022 and is estimated to hit $928.4 billion by 2030, according to a report from Research and Markets. If you own your own company and travel for business, you may wonder whether you can deduct the costs of having your spouse accompany you on trips.

Is your spouse an employee?

The rules for deducting a spouse’s travel costs are very restrictive. First of all, to qualify for the deduction, your spouse must be your employee. This means you can’t deduct the travel costs of a spouse, even if his or her presence has a bona fide business purpose, unless the spouse is an employee of your business. This requirement prevents tax deductibility in most cases.

If your spouse is your employee, you can deduct his or her travel costs if his or her presence on the trip serves a bona fide business purpose. Merely having your spouse perform some incidental business service, such as typing up notes from a meeting, isn’t enough to establish a business purpose. In general, it isn’t enough for his or her presence to be “helpful” to your business pursuits — it must be necessary.

In most cases, a spouse’s participation in social functions, for example as a host or hostess, isn’t enough to establish a business purpose. That is, if his or her purpose is to establish general goodwill for customers or associates, this is usually insufficient. Further, if there’s a vacation element to the trip (for example, if your spouse spends time sightseeing), it will be more difficult to establish a business purpose for his or her presence on the trip. On the other hand, a bona fide business purpose exists if your spouse’s presence is necessary to care for a serious medical condition that you have.

If your spouse’s travel satisfies these requirements, the normal deductions for business travel away from home can be claimed. These include the costs of transportation, meals, lodging, and incidental costs such as dry cleaning, phone calls, etc.

What if your spouse isn’t an employee?

Even if your spouse’s travel doesn’t satisfy the requirements, however, you may still be able to deduct a substantial portion of the trip’s costs. This is because the rules don’t require you to allocate 50% of your travel costs to your spouse. You need only allocate any additional costs you incur for him or her. For example, in many hotels the cost of a single room isn’t that much lower than the cost of a double. If a single would cost you $150 a night and a double would cost you and your spouse $200, the disallowed portion of the cost allocable to your spouse would only be $50. In other words, you can write off the cost of what you would have paid traveling alone. To prove your deduction, ask the hotel for a room rate schedule showing single rates for the days you’re staying.

And if you drive your own car or rent one, the whole cost will be fully deductible even if your spouse is along. Of course, if public transportation is used, and for meals, any separate costs incurred by your spouse aren’t deductible.

Have questions?

You want to maximize all the tax breaks you can claim for your small business. Contact us if you have questions or need assistance with this or other tax-related issues.

Did you make large gifts to your children, grandchildren or others last year? If so, it’s important to determine if you’re required to file a 2023 gift tax return. In some cases, it might be beneficial to file one — even if it’s not required.

Who must file?

The annual gift tax exclusion has increased in 2024 to $18,000 but was $17,000 for 2023. Generally, you must file a gift tax return for 2023 if, during the tax year, you made gifts:

• That exceeded the $17,000-per-recipient gift tax annual exclusion for 2023 (other than to your U.S. citizen spouse),
• That you wish to split with your spouse to take advantage of your combined $34,000 annual exclusion for 2023,
• That exceeded the $175,000 annual exclusion in 2023 for gifts to a noncitizen spouse,
• To a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($85,000) into 2023,
• Of future interests — such as remainder interests in a trust — regardless of the amount, or
• Of jointly held or community property.

Keep in mind that you’ll owe gift tax only to the extent that an exclusion doesn’t apply and you’ve used up your lifetime gift and estate tax exemption ($12.92 million for 2023). As you can see, some transfers require a return even if you don’t owe tax.

Who might want to file?

No gift tax return is required if your gifts for 2023 consisted solely of gifts that are tax-free because they qualify as:

• Annual exclusion gifts,
• Present interest gifts to a U.S. citizen spouse,
• Educational or medical expenses paid directly to a school or health care provider, or
• Political or charitable contributions.

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, you should consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

The deadline is April 15

The gift tax return deadline is the same as the income tax filing deadline. For 2023 returns, it’s Monday, April 15, 2024 — or Tuesday, October 15, 2024, if you file for an extension. But keep in mind that, if you owe gift tax, the payment deadline is April 15, regardless of whether you file for an extension. If you’re not sure whether you must (or should) file a 2023 gift tax return on IRS Form 709, contact us.

When you file your tax return, a tax filing status must be chosen. This status is used to determine your standard deduction, tax rates, eligibility for certain tax breaks and your correct tax.

The five filing statuses are:

• Single
• Married filing jointly,
• Married filing separately,
• Head of household, and
• Qualifying surviving spouse.

If you’re married, you may wonder if you should file joint or separate tax returns. It depends on your individual tax situation.

In general, you should choose the filing status that results in the lowest tax. But keep in mind that, if you and your spouse file a joint return, each of you is “jointly and severally” liable for the tax on your combined income. And you’re both equally liable for any additional tax the IRS assesses, plus interest and most penalties. That means the IRS can come after either of you to collect the full amount.

Although there are “innocent spouse” provisions in the law that may offer relief, they have limitations. Therefore, even if a joint return results in less tax, some people may still choose to file separately if they want to only be responsible for their own tax. This might occur when a couple is separated.

In most cases, filing jointly offers the most tax savings, especially when the spouses have different income levels. Combining two incomes can bring some money out of a higher tax bracket. Filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use “married filing separately” rates. They’re less favorable than the single rates.

However, there are cases when married couples may save tax by filing separately — for example, when one spouse has significant medical expenses. Medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in a larger total deduction.

Only on a joint return

Keep in mind that some tax breaks are only available on a joint return. The child and dependent care credit, adoption expense credit, American Opportunity tax credit and Lifetime Learning credit are only available to married couples on joint returns. And you can’t take the credit for the elderly or the disabled if you file separately unless you and your spouse lived apart for the entire year. You also may not be able to deduct IRA contributions if you or your spouse were covered by an employer retirement plan and you file separate returns. And you can’t exclude adoption assistance payments or interest income from Series EE or Series I savings bonds used for higher education expenses.

Social Security benefits

Social Security benefits may be taxed more when married couples file separately. Benefits are tax-free if your “provisional income” (AGI with certain modifications, plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return, but zero on separate returns (or $25,000 if the spouses didn’t live together for the whole year).

Circumstances matter

The filing status decision you make when filing your federal tax return may affect your state or local income tax bill, so the total tax impact should be compared. There may not be a simple answer as to whether a couple should file jointly or separately. Various factors must be examined. We can help you make the most advantageous choice. Contact us to prepare your return or if you have any questions.