As a newly married couple, there are many important decisions to make, one of them being how to handle your taxes. This can be especially complicated if you and your spouse have different citizenships and are living in different countries. One common question that arises in this situation is whether to file your taxes jointly or separately. While there is no one-size-fits-all answer, it's important to understand the pros and cons of each option before making a decision.
What is the difference between filing jointly and separately?
First, let's define what it means to file jointly or separately. When you file jointly, you and your spouse combine your incomes and deductions on one tax return. This is often seen as the default option for married couples. On the other hand, filing separately means you and your spouse each file your own tax return, reporting your individual incomes and deductions.
Now, let's dive into the pros and cons of each option.
The Pros and Cons of Filing Jointly
One of the main benefits of filing jointly is that you can take advantage of certain tax deductions and credits that are not available when filing separately. For example, you may be able to claim a higher standard deduction and take advantage of certain tax breaks, such as the Earned Income Tax Credit or the Child and Dependent Care Tax Credit.
Additionally, when you file jointly, you and your spouse are considered one tax entity. This means that you can potentially lower your overall tax liability by combining your incomes and deductions, especially if one spouse earns significantly more than the other.
However, there are also some drawbacks to filing jointly. For instance, if one spouse owes back taxes or has other financial obligations, the other spouse may become liable for those debts. This is known as joint and several liability. Additionally, if you and your spouse have different levels of income, filing jointly may push you into a higher tax bracket, resulting in a higher overall tax bill.
The Pros and Cons of Filing Separately
One of the main advantages of filing separately is that you are not held responsible for your spouse's tax liabilities. This can be beneficial if your spouse has a high amount of debt or past tax obligations. Additionally, if one spouse has a significant amount of itemized deductions, filing separately may result in a larger tax refund.
However, filing separately also has its downsides. For example, you may not be able to take advantage of certain tax deductions and credits that are only available to joint filers. This includes the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC), which may be important for your situation as a graduate student in the US and a PhD student in Canada.
It's also worth noting that when you file separately, you and your spouse cannot split certain deductions and exemptions. This means that you may not be able to claim certain deductions, such as the student loan interest deduction, or the Child and Dependent Care Tax Credit.
What should you do?
As you can see, there are pros and cons to both filing jointly and separately. Ultimately, the decision will depend on your individual circumstances. It's always a good idea to consult with a tax advisor before making a decision, especially if you have a complex tax situation like yours.
Keep in mind that you can also file jointly one year and separately the next. It's not a permanent decision, and you can reassess each year to determine which option will result in the lowest tax liability for you and your spouse.
As a married couple with different citizenships and living in different countries, it's important to carefully consider the pros and cons of filing jointly or separately. While filing jointly may offer certain tax benefits, there are also potential drawbacks to be aware of. It's always best to seek the advice of a tax advisor to determine the best course of action for your specific situation.
Remember, the decision to file jointly or separately is not a permanent one, and you can reassess each year to determine which option is most beneficial. By understanding the pros and cons of each option, you can make an informed decision and ensure that you are maximizing your tax savings as a married couple.