08/01/2016 - 0 Comments - Featured

Many new clients come to us with their tax information and ask how much it will cost to file a return. I tell them our standard rates which start at $125 for a single return and $200 for a couple. It can cost more if there is a lot of work involved, but for most people the basic fee is sufficient to do the job.

Almost without fail, the new client will explain they want us to prepare only one or the other of the couple’s returns; not both. I’m not sure if they are trying to save $75 or if it is just because they are embarrassed to ask a professional for help for what seems like a very simple task. However, we have learned that the situation is usually not as simple as some would think.

‘Til Taxes Do Us Part

We usually recommend strongly that we prepare both returns together for several reasons. We typically recover thousands of tax dollars as a result of optimizing the returns to the maximum benefit of the household. There are several strategies that may trigger tax savings for the household. I will list a few of them here with a brief explanation of how taxes can be reduced.

Medical Expenses

Household medical expenses can be claimed on the return of either spouse. Usually it is beneficial to claim medical expenses on the return of the spouse with the lower net income. As a rule, medical expenses must exceed 3% of a taxpayer’s net income in order to realize any possible tax credit. If each spouse claims his or her own medical expenses, the 3% net income threshold has to be satisfied on both individuals’ returns. By combining and claiming all medical expenses on one return the household needs to satisfy this threshold for only one individual. And by claiming medical expenses on the return of the individual with the lower net income, the threshold is lower which usually results in a larger tax credit.

Pension Income Splitting

Taxpayers earning certain types of pension or annuity income may be eligible to split some of this income with their spouse. While not always the case, this practice can result in significant tax savings where one spouse is in a higher tax bracket than the other. While the principle behind pension income splitting is straight forward, the formula to optimize the level of splitting is complex and requires several recalculations through trial and error until the maximum benefit is reached. Good tax preparation software makes this optimization very easy as long as the returns are coupled.

Family Tax Cut

New for this year, eligible couples with minor children may be able to shift up to $50,000 of income from one spouse to the other to realize up to $2,000 in tax credits.

Other Transfers

While the first three situations would seem to have the largest impact on tax savings, there are several other amounts that can be transferred from one spouse to the other. These transfers tend to benefit couples the most when one individual has eliminated his or her federal tax and the other spouse is still taxable. These amounts include the age amount, amount for children, the pension income amount, the disability amount, and up to $5,000 of tuition, education and textbook amounts. Finally, donations can be combined and claimed on either spouse so that the lower tax credit on the first $200 of donations has to be used up only once.

Tax Case 101

We ran into a great example of this situation just last week where a friend of mine brought in his wife’s return because his wife had retired during the year. He wanted to make sure her return was handled properly. He said he would do his own return because there was “nothing to it”. As it turns out, the couple had medical expenses, not to mention the pension income his wife is now earning. Our personal tax manager convinced this client to bring in his own return as well so we could file them jointly. Ultimately we saved this couple over $3 thousand dollars in taxes! Needless to say, they were very pleased with this outcome!

There are many other scenarios that may need to be considered depending on your unique situation. If you or your spouse has a tax return you feel may be over your head, and the other return is straight forward, you should strongly consider asking your tax professional to take care of both returns for you. The small increase in fees could result in huge returns!

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