ANOTHER SOMETHING TO THINK ABOUT

In a recent post from Jason Dinesen - “Iowa Taxes: Married Filing Separately on Combined Return vs. Married Filing Separately on Separate Returns” – Jason talks about the unique filing choices on the Iowa state income tax return.

“A married couple in Iowa can choose from one of 3 filing statuses:

1. Married filing jointly

2. Married filing separately on a combined return

3. Married filing separately on separate returns

Married filing jointly is typically used only in cases where one spouse has income and the other spouse has no income. Otherwise, one of the ‘separate’ statuses will almost always produce better results. This is because Iowa has just one tax bracket, which applies to all filing statuses. Filing separately allows spouses to split their income up and get taxed separately, thus producing a lower tax liability than filing jointly.”

I like this.

I recall that a similar situation – filing separately on one return - also existed on the New York state income tax return back when I first started out. 

This idea, including one tax bracket for all taxpayers, should be applied to the federal return.

I believe that the US Tax Code should create neither a “marriage tax penalty” nor a “marriage tax benefit”.

In my tax reform plan the Married Filing Separately status would permit a married couple, whether living together or not, to file one return as if they were filing two individual returns as Single. All of the exclusions from income, deductions and credits that are available to a Single filer would be available to each spouse under the Married Filing Separate status.  As there would be only one tax schedule for all taxpayers, regardless of filing status, the Tax Rate Schedule (and Tax Table) for Married Filing Separately would be exactly the same as that for Single.

Like Iowa has, there should be a special 1040 and 1040A form that would allow both spouses to file separately on one return. Married taxpayers would still have the option of filing separately on two separately filed returns, for the reason outlined in Jason’s post – creating separate liability.

I am not sure if instead of 3 filing categories for couples there should be only 2 – the equivalent of Married Filing Separately on a combined return or on separate returns.  Perhaps there should be no Married Filing Joint category, and spouses should be required to split their individual incomes and deductions to calculate the tax. 

If there were a Married Filing Joint status it could provide for double of everything available to the Single status. For example, if, as under current law, a Single filer can deduct up to $3,000 in net capital losses per year, a married couple filing jointly would be able to deduct up to $6,000. The standard deduction for Married Filing Joint would remain twice that for Single.  This would provide a “marriage tax benefit” for couples with only one earning (you notice I did not say “working”) spouse or spouses with substantially disproportionate incomes and deductions.   

Or perhaps the net taxable income on a Married Filing Joint return would be divided by two, the tax determined from either table or rate schedule on this half of the combined income, and then multiply that tax amount by two. This method assumes that income earned by and deductions allowed for the couple combined apply equally to each spouse if they had filed separately.  John and Jane Q Taxpayer file a joint return. The net taxable income on the return is $100,000. The tax is taken from the tables is based on $50,000 of income. If the tax on $50,000 is $7,500, then the tax liability on the joint return is $15,000.

I expect there would be some issues with “community property” states.  However I have no knowledge of or experience with community property states, nor do I want any, so I cannot properly address these issues.

There would be no separate status or tax rate schedule for Head of Household.  The tax benefits currently provided by the Head of Household and Qualifying Widow(er) status would be replaced by an either an increased dependent personal exemption or dependent tax credit.  If a dependent exemption is used it would be much greater than the personal exemption allowed for taxpayer and spouse.  If a dependent credit is allowed then there would be no personal exemptions for dependents.

This is certainly something that requires some serious thought and discussion.

So what do you think?

TTFN