Are You Inviting Financial Trouble by Automatically Filing Taxes Jointly With Your Spouse?

Ralph00:00:00

Are you feeling overwhelmed by tax season? Do you automatically file your taxes jointly with your spouse without even considering the potential risks? Filing jointly could actually lead to shared responsibility for your spouse's tax issues, loss of individual control, and even increased tax liability. So today, we're going to get into the potential pitfalls of filing taxes jointly and explore how you can make an informed decision that aligns with your faith and financial goals. So don't miss out on this crucial discussion that could save you from financial trouble and give you peace of mind. Our listener, John asks, are you inviting financial trouble by automatically filing taxes jointly with your spouse? That's the question I'm going to answer on today's show.

Podcast Announcer00:00:46

In a world where crushing debt keeps you trapped, where living paycheck to paycheck has become your new normal, and where the dream of retirement seems impossibly out of reach, there's hope. Join financial evangelist Ralph Estep Jr. A man who's walked through the fire of financial failure and emerged stronger on the other side. Welcome to Ask Ralph, the show where real world experience meets biblical truth to break the bondage of financial despair. Get ready to take control of your money, break free from the financial stress and align your resources with God's purpose for your life. This is Ask Ralph with Ralph Estep Jr.

Ralph00:01:23

Welcome and thank you for joining me today on the Ask Ralph show. I am your Financial Evangelist, and I am thrilled you've chosen to spend your valuable time with me. Today's topic is one that could significantly impact your financial wellbeing and your peace of mind. So let's get right to it. Now, on yesterday's show, we discussed how to turn reasonable cause into IRS penalty forgiveness. If you're one of those people that's suffering with IRS penalties, maybe you've filed late or you paid late, yesterday, I explored the importance of understanding the IRS's perspective and how to present a case effectively to perhaps get those penalties removed. So if you missed it, I'm going to encourage you to go check it out. You can do that at askralph.com. That's where you'll find all of our episodes. Well, today's heartfelt and thoughtful question comes to us from John, and this is what John writes. "Ralph, my wife and I have always filed our taxes jointly because it seemed like the easiest and the most beneficial option. But lately, I've been hearing stories about couples who have faced serious financial trouble just because of their filing. My wife has been dealing with some health issues, and her medical expenses are really piling up. We're also looking at a potential job change for me, which could significantly increase our income. The more I think about it, the more I worry that we might be setting ourselves up for a financial disaster. Are we inviting financial trouble by automatically filing taxes jointly? What should we consider before making this decision? I feel like we're walking on a tight rope, and one wrong step could send us spiraling into financial abyss. Please help us navigate this confusing situation. Thank you." Well John, thank you for your question. And I can feel the stress. I can feel the worry in your words. And I want you to know that you're not alone in this. A lot of people just assume that it's the best thing to file a joint tax return because it's the obvious choice. But you think, the thing you need to understand is it does come with some significant implications that could cause a lot of anxiety and confusion. And I've seen many clients go through these similar situations like you talked about, John, and I truly understand how overwhelming it can be, but don't worry because today we're going to explore the pros and cons, and I'm going to provide you with a concrete action plan to make an informed decision. So John, my big takeaway from the beginning is there is hope in this and you're not alone. And remember this, just like John, if you've got a question, you can submit it by going to justaskralph.com because here's the truth. I love answering your questions and it truly is the heart of what we do here on the show. Well John, let's get our discussion started with a Bible verse that I think speaks directly to what you're talking about. And it comes to us from the book of Proverbs chapter 11, verse 13. Now, it seems a little unusual, but let me take you down this road. Says this. "A gossip betrays a confidence, but a trustworthy person keeps a secret." You might be saying, Ralph has lost his mind. What does that have to do with the decision of filing taxes? Well, here's the thing I want to talk about. In my view, this verse emphasizes the importance of being honest, it emphasizes transparency in our financial matters, especially within a marriage. So just as we're called to be trustworthy on our relationships, we should also be transparent and honest in our financial dealings. Another thing. This verse serves as a reminder that making informed financial decisions, including those things about how we file our taxes, is crucial for maintaining trust and integrity in our marriages. And that's what we're all looking to do. So as I get started today, I just want to tell you that I am truly grateful for this opportunity to discuss this topic with you today, because God has given me the experience and the understanding to help people just like you, John, navigate these financial challenges, not only from a financial position, but from a place of faith. So I am so thankful to you and all the listeners who trust me with these questions every day and allow me to share my knowledge to help you find financial peace and grow in your faith. Well, let's get right to it. John, I'm going to answer your question. Filing taxes jointly is often presented as what we'll call the most advantageous option for married couples. A lot of people go to a tax person or they file their own taxes and they just assume, Hey, that's the way it has to be done. But it's not a decision that should be made lightly. A lot of people don't even think this true because there are some potential benefits and there are some potential drawbacks that we need to consider carefully. So John, let's talk about some of those potential drawbacks of filing jointly. The biggest one, and this is the thing you've got to understand is shared responsibility. See, when you file your taxes jointly, both spouses become equally responsible for the accuracy of the return and any taxes, any interest, any penalties that are owed. It's yours, it's his, it's hers. However you want to look at it. So we call it joint and severally liable. So big picture, if the IRS wants to come after you, and let's say your spouse just says, well, I'm not paying. Guess what? They'll come after you as well. And see, this can be problematic if you've got one spouse that has a history of tax issues, or if there's a lack of transparency, like the two spouses don't talk to each other, there's some kind of shadiness in their financial dealings, that can be a huge issue when it comes to taxes, because if you filed a joint tax return, you're going to be on the hook with that. One of the most common things I've seen in my practice is one, is when one spouse underreports income. They're not sharing all their income. Maybe they're not talking about some of this other income they have, or they claim deductions that they're not entitled to. And here's the big picture. If you file a joint tax return and listen, I'm not saying you shouldn't. Let me be clear about that from the beginning, but if you file a joint tax return, both of you will be held liable. And see, this can be problematic if one spouse has a history of tax issues, or if there's a lack of transparency in the couple's financial dealing. See, if one spouse under reports income, let's say that spouse doesn't tell you about some account they have or some side business they have. Or they claim deductions that they're not entitled to. Here's the problem. Both spouses can be held liable for any resulting penalties or back taxes. So John, that's the first thing you need to consider when you're filing a joint tax return, you are sharing that responsibility. So let's look at the next thing and that's loss of individual control because filing joint means that you're giving up some individual control over your tax situation. Now, let me be clear. Most of the time, this is what I do for a living. Most of the time there's going to be a tax benefit to filing jointly but you need to understand that you are giving up some individual control and maybe that makes sense because it's beneficial. Now the problem is that loss of control might not align with the biblical principles of personal responsibility and accountability for one's finances. Now I'm going to argue and say that if it's beneficial for the couple, a lot of times when people come in and sit down with me, I'll say to them, listen, let me be very clear. Are we doing this for the better of you, your spouse, or are we doing it for the family? And see, here's the one thing we see sometimes, maybe one spouse prefers to handle their taxes one way and another prefers to handle theirs another way. I have this all the time in my office. Sometimes a husband or wife will say, well, I don't really want to take those deductions because I don't think those charities are legitimate or he wants to take a big deduction for all these clothes they gave away. But Ralph, the numbers just don't make any sense to me. So you really have to take a hard look and say, are you willing to let go of that personal control for the benefit of filing a joint tax return? So that's the second thing. The third thing is the potential for increased liability. This is just a simple math equation. In some cases, filing jointly can result in higher tax liability than if you filed separately. Now, we see this a lot if one spouse has significant medical expenses, just like it was talked about in your question, or if the couple's combined income pushes them into a higher tax bracket. Now, this is a little bit of a game. One of the nuances of tax code. And see right now, the brackets for married filing separately are different from those of filing jointly. For example, let me just get down to the details here. So in 2024, the 24 percent tax bracket for married filing jointly begins at $201,051. While married filing separately, it begins at a 100,526. So what this basically means that if both spouses have similar incomes, filing separately might keep them in a lower tax bracket. So John, that could be a situation and it could reduce your overall tax burden. So one of the things that I do every day in my practice, when someone comes in to get their taxes done, I run an analysis of married filing jointly, married filing separately, and I look at which would be better for the individual tax situation. So those are really the big three things. You know, you have to really consider that you've got shared responsibility, you've got that loss of individual control, and Hey, in the end, financially, it might not be the best choice. So you want to make sure if you're doing your own taxes or if you have someone doing them for you, that they're taking a look at that. So let me talk about some real life examples, John, of where I've seen this happen, because there are issues that happen sometimes financial trouble where this can cause an issue. For example, let's say you have a wage garnishment, or let's say that you get a wage garnishment because one spouse has unpaid taxes. And see by filing jointly, that can result in both spouses wages being garnished to cover that debt because the IRS is going to get their money whether it's from you or whether it's from your spouse. So if you filed that joint tax return, the thing you need to understand is the IRS can come after you Hey, they can actually ignore the spouse altogether because maybe they say hey, you know Ralph and Ralph and his wife Ralph's got the income or his wife's got the income. So we're gonna go after her, that's a very common thing. Now, the other thing you can, you have to be careful of, and I see this all the time in my practice is let's say you file a joint tax return, but your spouse has tax debt from previous years. Well, the IRS can actually offset that income. Even if the latter, even if you had no involvement in the creation of that tax debt. So what I'm talking about there is let's say that you got married in 2024. Well in 2023, your now spouse, filed a tax return and on that tax return, they owed the IRS money. Well, now fast forward 2024, you file a joint tax return. Well, since that money was never paid for 2023, the IRS now that you filed that joint return can take your refund. So you really have to understand that these are some of the potential financial risks that are associated with joint filing. So you need to be wise in making that decision. So John, let me talk about some particular situations where I found it beneficial to file separately. Now, like I said, the default or the, you know, the standard is to file jointly, but there are some specific situations that it might be more tax advantageous to do a separate return. One of the things you mentioned in your letter, John, was significant medical expenses. And I've seen this play out in real life. If one spouse has incurred substantial medical expenses, maybe they've got some kind of terrible diagnosis or they don't have insurance. That's where filing separately might allow them to deduct a larger part of their expenses because that threshold for pay or for deducting medical expenses is based on a percentage of the adjusted gross income. So if your adjusted gross income by filing jointly is much higher, that seven and a half percent threshold gets harder to get to. Now I have to be totally candid with you. You have to think that through because, and I want to get too much in the weeds here and bore everybody but if spouse A decides to itemize, then spouse B needs to itemize as well. So you have to be really cautious how you play that out. Another thing I've seen in my practice is student loan repayment. If you've got a situation where you've got student loans and they're on what's called an income driven repayment plan. In other words, you pay based on your income, sometimes filing separately can result in lower monthly payments as the payment calculation is based on that individual income. I've actually had a couple of situations with clients over the past 30 years of experience where this has made sense and they filed separately each year because they were in that payment type or that student loan, where there was a payment that was based on their income. And actually one of the most interesting thing is I work with somebody not too long ago, and he's still a client now. I won't use his name, but he's still a client now. And what he wanted to do was to pay as little as possible on his student loans, because at some point, he's in the public service sector, those loans will be forgiven. So he just had to work for a certain number of years and then all of a sudden those loans are forgiven. So for him and his wife, it made perfect sense to file separately because we kept that individual income down and his loan repayments were less. One of the big things you might want to consider also, John, is that protecting against liability. We talked about this a few minutes ago. If your spouse now has tax liens or tax issues from previous years, you might be worried about, are you going to be liable for those by filing a joint tax return? I hear about this talk about sometimes they don't tell you about those dirty little secrets. Those tax secrets, because there's not a good level of financial transparency within the marriage. So if you have that situation, that's where filing separately can protect you from being held responsible for others tax obligations. And I do see this sometimes. I've got some clients and most of the time I got to be blunt with you. I don't see the other party. The other party is doing their own thing, but the one that I'm working with comes in and says, Ralph, you know, I don't want to be responsible for my husband's garbage. Okay. I'm like, that's fine if you don't wanna be responsible, the easiest way from now, I'm not an attorney, so I won't be giving legal advice, but the easiest way from a tax perspective is if you file a separate tax return because then he's gotta file his own return, you file yours and you make it look what makes, makes. Now there are some issues revolving around that, but you gotta really consider that if you're worried about liability. Another thing I talked about a little while ago was maintaining that financial independence. And this is where it gets into a whole discussion that some couples feel like filing separately better aligns with their desire to maintain that, that financial independence within the marriage. They point to some biblical principles on personal responsibility. Again, I put that in the show today because it's something that when I did some research, that was something that was brought up, but I gotta be honest with you. I think you have to look at that and say, you know, what's the trade off here. Another one that I hadn't considered because in Delaware, we are not a community property state, but in community property States, you got to consider the impact of that as well, because here's the thing. And I didn't even realize this until I started doing the research for the show today. In community property States, spouses have to report half of their combined income deductions even if they're filing separately. I had no idea about that. So that's one of the other things you want to consider. Another big one is retirement savings. Sometimes filing separately could affect your eligibility for certain retirement savings plans and contributions. Again, I'm not going to get into the details on that, but just be aware of that. And one big one, this is one a lot of people don't expect. Sometimes filing separately can disqualify you from claiming certain tax credits and certain deductions. Those are things like the earned incomes tax credit, the child and dependent care credit and education credits. And this is what a lot of people aren't aware of. So this is all about that give and take. And we're going to talk about in a minute or two, John, how you make that informed decision. One of the big ones that a lot of people aren't aware of is if you have rental losses. And you file separately, the IRS won't let you take those rental losses at all. So that's where you've really got to have a professional like me or someone that you trust help you walk through what are the particular options. So John, you might be saying at this point, Ralph, okay, I get it. I can file together. I can file separately. You talked to me about liability. You talked to me about financial independence. You talked to me about sometimes financially, the tax code is written to make it better, but how in the world do I make this decision? Well, I think the bottom line, John, and for everyone else listening is you got to make an informed decision. And it's a personal decision. I can't say to you as you're looking at this camera, you're listening to the show today, what the best decision is for you. You have to really consider all the options and understand your particular situation. And as a Christian, I think we need to be prayerful about it and carefully consider the individual circumstances. So here are some practical steps that I think we as Christians can take when trying to decide what to do. First thing you've got to do, and this is just as simple as putting the tax return together, is you've got to gather all your necessary information. That's your W-2s, your 1099s, and other documents related to your income, to your deductions, and the credits for both spouses. And then here's the thing. This isn't rocket science. You just got to calculate your tax liability under both of those scenarios. One of the things that I use is tax software that will allow us to do this. So this might be something that's a little, what I say over your skis. So you might want to go meet with a tax professional. I do this probably a couple of times a week. A couple will come in and say, Ralph, we want to understand, is it better for us to file jointly? Is it better for us to file separately? And I'll say, great, here's your options. We put pen to paper. We put computer to screen, I guess is a better way of saying it and we determine out what is the best option for your particular situation. You also have to look at your financial goals and your financial values. Again, if you've got one spouse, it feels very uncomfortable with what the other spouse is doing, that might be a big red flashing sign is I'm going to file separately. I get it. Sometimes you don't want to take on that responsibility. I remember many years ago, I had a client, husband and wife, and the husband, to be very candid with you was a bookie. He was somebody that, you know, was involved in a gambling and we'll call it under the, under black market gambling for back of a better term. But, and see the wife knew about this and she would come to me and she'd say, Ralph, listen, I love my husband. We have a great marriage, but I do not want to be responsible if the IRS comes back later and says, Hey, you're responsible for this tax because you never claim this income. So in that case, I said to her, here's the best thing you can do. We'll file separately. Now, the husband wasn't happy about that, but you know what? She has to sign that return. So that was ultimately her decision. So that's why I'm going to, I'm going to land here for a second. So pray about this, seek God's wisdom in this. If you feel conflicted about it, the best thing I can tell you is don't file a joint tax return. You don't want to be responsible for someone else's tax liability. Now, a lot of times I'll see this if there's a divorce pending. Where they're still married for the tax year, but then they come into me and they say, Ralph, Hey, we're getting divorced. We're not friends anymore. It's a terrible thing to say. I did a show about divorce a few days ago, maybe a week or so ago, but that's when I'll see this discussion. Oh, you know, we could still file jointly for last year. Ralph, what are our options? And my big takeaway, and I say this routinely on the show, if you're unsure about the best course of action for you, consult with a professional. I'm going to tell you to consult with a Christian financial advisor or a Christian tax professional who can provide you with that personalized guidance. Just like I do when I walk through the clients, here are your options. I know we covered a lot today, so I just want to leave you with this. I write a daily blog post based on the content of the show where I go even a little deeper. I share some specific resources I used in creating today's show and some valuable items that you can go and see where, where did Ralph come up with this stuff. I do that every day with the show, and you can find that by going to askralphpodcast.com/blog, because the truth is, I can't cover everything in the show. And if you've been listening, you know, I've been getting a little long. Well my goal now is to cut these episodes, link down a little bit so I can be more direct and be more precise and concise in answering your questions. So now let's get to our reflection questions. You know, I always like to come back and let's, let's think about what we talked about today. So the first one is this. Have you and your spouse discussed the potential risks and the benefits of filing taxes jointly versus separately? I think this is a conversation that you should have. You may very well end up still filing a joint tax return. I would venture to say that 95 percent of the time, assuming both parties are transparent and they communicate, it's usually better. So, but have you discussed it? I think that's a legitimate discussion to have. Second thing, how can you apply biblical principles? Those biblical principles of stewardship and transparency when you're making this decision about filing statuses. And number three, And I think this one is huge. I did a show a week or two ago about financial infidelity. I really think you need to think about what steps can you take to ensure that you have open communications and trust in your financial dealings with your spouse? Because again, do you want to take on that liability if your husband or your wife is not telling you about something that maybe it was from years ago, they didn't pay taxes or maybe they've got some income, they're not reporting. So that is a real big question you have to ask yourself. Now I want to ask you a favor. I would really like you to consider supporting the show. The reason that I'd like you to do that is I'd like to reach more people. I'd like to be on more platforms. I'd like to provide more content. And if you can partner with us in the show, we can do that. We can help people find a better financial peace. We can help them to give them the tools they need. So if you can consider doing that, just go to askralphpodcast.com/support and become a partner with us and let's really impact people's lives. All right, well let me give you my key takeaways. These are the key takeaways from today's show. Filing taxes jointly can lead to shared responsibility, it can lead to loss of individual control, and even potential increased liability. You have to consider the biblical principles of stewardship, the biblical principles of trust, transparency, and avoiding debt as you decide on what to do here. Now, we talked also about some specific situations where filing separately could be advantageous. We talked about medical expenses. We talked about those student loan repayment options. We talked about protecting against liability. We talked about maintaining financial independence. We even mentioned this community property laws. We talked about some of the options for retirement savings and the loss of tax credit and deductions. And in the end, we arrived at this. Make an informed decision by gathering the financial information, looking at your different options, thinking about your financial goals, and then praying for guidance and seeking wise counsel. Now, maybe you've listened to this and you're feeling overwhelmed by the decision of how to file your taxes. You don't need to walk this path alone. You can book a call with me and I will help you find the right path for you. I'll help you find peace in dealing with this financial issue. We'll create an individual plan tailored to your unique situations. I'll run both scenarios and see what works best for you. The best thing you can do is book a call with me. You go to askralph.com at the top of the screen. Just click on that button. It says, book a call with Ralph. Do me a favor and do yourself a favor. Take that first step today and find financial peace of mind. All right. Well, I just want to share a few letters that we've got over the last few days of people who have been helped by the show. And I want to demonstrate the power that this show is having and how it's impacting the lives of our listeners. And listen, I truly want to hear from you because that's what keeps me going and producing this daily content. So I'm going to encourage you to send me an email to ralph@askralph.com, but here's a couple comments that we got. This first one says, "Dear Ralph, I can't thank you enough for this show on IRS penalty forgiveness. I've been struggling with penalties from the past and I didn't know where to turn, but your advice on presenting a case for reasonable cause, it gave me the confidence I needed to approach the IRS. So thank you for your guidance, I was able to get the penalties waived. Your show has been a lifesaver for me." Well, I am glad that it's impacting you. Here's another letter we got, "Ralph, your episode on, it seems to be a theme here. Your episode on IRS Penalty forgiveness was incredibly helpful. I had no idea that there were specific steps and strategies to present my case effectively. After listening to your show, I gathered all the necessary documents and I followed your advice. The IRS ended up accepting my explanation and I was able to avoid a significant financial burden. So thank you for sharing your knowledge and experience." I am so happy that worked out for you. And the final one for today says this, "Hi Ralph, I just wanted to let you know how much your show has helped me and my family. We were facing some serious tax issues and I didn't know where to start. Your episode on IRS Penalty Forgiveness was a game changer for us. We followed your steps and to our relief and the IRS agreed to waive the penalties. Your show has been a blessing to us and we're so grateful for your guidance. God bless you and God bless your work." Well, I just want to say God bless you and thank you for listening. Now, tomorrow we're going to be discussing self filing taxes. That's the decision to do them yourself and the painfully common errors that can land you in trouble with the IRS. So that's a show you don't want to miss. I just want to say thank you for your time today. I want to say thank you for supporting this show. I want to encourage you to share it with others who can benefit from the content. Just send them to askralph.com and remember this, my passion is to help you achieve financial success. I want to see you live out your dreams and I want to see you grow in your faith and I know together, working together, we can master your finances from that Christian perspective. So as I always end the show, stay financially savvy out there and may God bless you abundantly.

Podcast Announcer00:27:55

Thank you for joining us on the Ask Ralph show. And with a simple click to subscribe, we'll invite you back to our next episode. And remember financial issues don't have to be complicated. Just Ask Ralph. The information contained in this episode of Ask Ralph is based on data available as of the date of its release. Saggio Accounting Plus and Ask Ralph Media, Inc. Is under no obligation to update this content if changes occur.Applying this information to your specific situation requires careful consideration of all facts and circumstances, and any information provided is not to be considered as financial, tax, or legal advice. Please consult your tax advisor or attorney before acting on any material covered.