RTS #063 Is it “me” or “us”?

The IRS is hardly a beacon of consistency and logic, but there are some areas that are a bit more perplexing, particularly when it comes to married couples. When our tax team is working with clients, there are a couple of areas, in particular, we look at to make sure we aren’t adding complexity to the marriage dynamics:

• Filing Status – this one is straightforward for most taxpayers: you are either married or you aren’t, but in some cases, that is an oversimplification. It’s important to remember that the IRS cares about your LEGAL marital status on 12/31 of the tax year, there is no pro rata calculation. Also, it is important to remind married clients that married filing jointly in most cases is preferential to married filing separately, and those are the only options they get if they are married at the end of the year.

• Contribution Limits – most contribution limits, particularly retirement accounts, are individual limits. That means each spouse gets to determine and contribute to retirement accounts (somewhat) regardless of what the other spouse does. The amount I contribute to my 401(k) does not impact how much my wife is eligible to contribute…BUT, the type of retirement accounts I am participating in could effect her ability to make deductible IRA contributions (it’s never easy).

• Other Contribution Limits – we started with “most” because it is definitely not “all”. Health Savings Accounts (HSAs) are a notable exception. The contributions for HSAs can either be “individual” or family” based on the type of health insurance coverage a couple has but that does not mean each couple has a separate contribution limit, like with retirement accounts or IRAs. If I have qualifying health insurance and one of my kids is also covered I meet the definition for “family” coverage and contribute up to that limit, leaving nothing left over for my wife to contribute even if she has separate qualifying coverage.
  • BONUS – unlike the retirement plan contribution limits that have separate buckets for “employee” and “employer” contributions, HSA contributions are single bucket, and it stop at the same point regardless of whether it is the employer or employee filling it.
• Earned Income – to make IRA and Roth IRA contributions, taxpayers need earned income (which is not the case for HSAs). Even though the contribution limits are determined at the individual level, earned income is determined at the household level. Which means if my spouse has $100,000 of earned income and I have none, we can still both contribute the full amount to an IRA or Roth IRA. I don’t need my own separate earned income.
• Fun with States – less common, but we’ve had multiple questions come up recently from clients, so here’s a good reminder: not all states require a couple to use the same filing status at the state level as at the federal level. This is a state-by-state distinction and typically is only relevant when you have spouses living in different states, so this is more “gee whiz” knowledge so you know when to ask more questions.

These are all areas that the RTS Tax Team has helped Premiere Members and their clients with this year so we wanted to pass along the trivia so more couples are successfully navigating this area of the tax labyrinth.

Happy Tax Planning!