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Ask Farnoosh: I Just Got Married. Should We File Taxes Jointly or Separately?

Nadine tweets: I got married in July. Should we file taxes together or separately for 2012?
 
As a married couple, there are myriad financial decisions to make over the next several years as husband and wife, but the one that creeps up on you the quickest is often regarding good old Uncle Sam. How to file your taxes? You have two choices: Married Filing Jointly (MFJ) or Married Filing Separately (MFS).

There are a number of considerations to make before designating your status (more on that in a second), though it’s clear that the IRS plays favorites and prefers couples to file jointly. File separately and you may lose the ability to claim key tax benefits such as the student-loan-interest deduction and the earned-income credit. You’re also left with a lower income phase-out range for deductions. What’s more – you both need to choose the same method of recording deductions – standard or itemized. In short, this filing status tends to result in the bigger tax bill and it’s why many accountants advise their clients to file jointly.
 
That said, there are a few notable advantages to filing separately, which may appeal to you and your spouse. For example, if one of you greatly depends on itemized deductions to lower your taxable income, filing jointly may require reporting a much larger, combined adjusted gross income, which may reduce your chances of being able to itemize some major deductions. Popular itemized write-offs that are limited by AGI, for example, include medical expenses (which must total 7.5% of AGI before the deduction kicks in for 2012), personal casualty losses from theft, accidents or destruction (must total 10% of AGI), and other miscellaneous itemized deductions ranging from accounting fees to unreimbursed business expenses related to work, which must total over 2% of AGI before taking effect. 
 
Another reason you may want to file separately is to offset potential financial risks or tax liabilities. Does your spouse or his tax preparer take certain liberties you’re not comfortable with? In that case, you may want to file separately for peace of mind that if an audit does crop up down the road, you won’t be on the hook, too. This probably isn’t something on too many newlyweds’ minds, but it’s unfortunately a price some couples pay for filing jointly. “Separating the liability from your spouse could prove to be a good and smart thing versus everyone going down with the ship,” says Joshua Jenson, a CPA in Edmond, Okla.
 
Finally, the state you live in may simply dictate what’s best. If you live in one of the nine so-called community property states (Arizona, California, Louisiana, New Mexico, Nevada, Idaho, Texas, Washington and Wisconsin), you may find it more convenient to file jointly, since your state requires you to go halfsies on most – if not all – income and deductions earned while married. If you file separately, there may be some added steps, such as reporting half your spouse’s income, in addition to yours.
 
Mitra posts on Facebook: My student loan was originally about $45,000, however since I have deferred it so many times due to financial hardships since graduation, and the late fees and finance charges, it has turned into $80,000. I have called the government and my university so many times to try to explain my situation and they all refer me to the collection agencies. The collection agencies are repeatedly harassing me and now they are threatening [to seize] my assets. What are my rights as far as these people harassing me? Should I take the calls seriously? Is there anything I can do as far as the finance charges and fees?
 
Dear Mitra,
 
Truly sorry about the financial stress you’re under. Yours is unfortunately a scenario familiar to many college graduates, as their loan payments have become far too much to handle. We may call student loans “good debt,” but fail to pay them back and you’re usually in for one painful, uphill battle with lenders. This can include mounting fees, ballooning balances, collection calls and in some cases, wage garnishment and a stop on tax refunds. Even if you declare bankruptcy, it’s extremely rare to win court approval to toss out your student loans.
 
The one (relative) bright spot here is that your loan stems from the government, which, while being a very powerful entity with the ability to inflict all of the above, tends to offer more flexible repayment options than private lenders. “With federal loans, there are options, one-time opportunities to rehabilitate a defaulted loan,” says Mark Kantrowitz, student loan expert and founder of Finaid.org and Fastweb.com. “To qualify for these opportunities, you must make nine out of 10 full consecutive, voluntary, on-time payments, at which point your loan will go out of default.”
 
After doing so, based on your financial hardship, you can then probably enter an income-based repayment plan, a new program that caps your monthly payments to no more than 10% of your income. Your other option after making these nine consecutive payments is to make big, lump-sum payments to the government. In return you may be able to cut a deal that allows all collection charges to be forgiven, half the interest accrued to be erased, or to reduce the outstanding balance by 10%.
 
As for those harassing phone calls from collection agents go, my advice is to make them stop. You have certain rights under the Fair Debt Collection Practices Act (FDCPA), which require collection agents to cease calls you after you’ve requested this in writing. Make a photocopy and send the letter by certified mail. Make sure to pay extra for a return receipt so you can be certain the letter made it. Once it’s received, the collector can only contact you in writing, unless it’s to tell you that they’ve, indeed, received your letter or to tell you about how the creditor plans to take specific action, like file a lawsuit.
 
Got a question for Farnoosh? You can reach her on Twitter @Farnoosh or email her at farnooshfinfit@yahoo.com.

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