Money Management

Did you know you could save money by filing jointly? 

Goodbye to New Year’s and hello to tax season! For married couples, you have the option of filing separately or filing taxes jointly. Which route you choose will depend on your situation, but many people are unaware of the various little-known perks associated with filing taxes jointly that can reduce your tax liability. Let’s take a look at six of these lesser-known perks that married couples should consider when filing their taxes.

1. Retirement savings

Filing taxes jointly gives married couples the ability to save more for retirement. In order to contribute to an individual retirement account (IRA) you must have earned income. But if you are married, then each spouse can contribute up to $6,000 ($7,000 if you are over 50) even if one of them isn’t working. This is done through a spousal IRA. This also doubles your tax deduction the year you make the contribution.

Another great benefit is that the phase-out limit to contribute to a Roth IRA is higher for married couples. If you are single and make more than $144,000 in 2022, then you are unable to contribute to a Roth IRA. If you are married, however, that limit is $214,000, so if your spouse’s income makes your combined income less than that amount, then you are able to take advantage of the benefits of a Roth. The same goes for contributing to a tax-deductible traditional IRA.

2. Personal exemptions

Personal exemptions offer taxpayers a break on their taxable income by allowing them to deduct certain items from their taxable income. When filing jointly, you will receive two personal exemptions instead of one. This could add up to hundreds of thousands of dollars in additional savings on your tax bill.

For example, the personal residence exemption for selling your home is $250,000 if you are single. The amount doubles to $500,000 if you are married, allowing you to keep more of your profits from the sale of your home.

3. Tax bracket benefits

Filing taxes jointly may allow you to take advantage of the lower rates associated with higher income brackets. If there is a big difference between what you and your spouse earn, you may be pulled down into a lower tax bracket. Let’s say you are earning $200,000. As a single filer, you would be in the 32% tax bracket.

But if you have a spouse that didn’t make money or less than the combined gross income of $340,100, then by filing jointly you would drop to the 24% tax bracket. This could mean significant savings for you, especially if you are on the cusp of a higher tax bracket. Keep in mind that filing jointly could also bump you up into a higher tax bracket, so make sure you do your research to find what is best for you.

4. Tax credits

Filing taxes jointly makes it much easier to qualify for certain credits, such as the Child Tax Credit, Child and Dependent Care Credit, Adoption Credit, Saver’s Credit, American Opportunity Credit, Lifetime Learning Credit, Earned Income Tax Credit (EITC), and many more. Credits are better than deductions since they reduce your tax bill dollar per dollar. When filing jointly, you may be able to claim an even larger credit than if either spouse had claimed an individual return.

5. Tax-free gifts

As a married couple, you can give gifts up to $16,000 each in value without having to pay any gift taxes on them. So you and your spouse can give up to $32,000 combined to any number of family members or friends without having to worry about filing a gift tax return. This number jumps up to $17,000 per person in 2023.

6. Deduction opportunities

Joint filers are eligible for higher deduction amounts than single filers, which can lead to even greater savings on their taxes. For 2022, the standard deduction is $25,900 for couples filing jointly, $12,950 for single filers and married individuals filing separately, and $19,400 for heads of households. This means you get to deduct more of your taxable income, thus reducing the total amount that you owe in taxes. Filing taxes jointly opens up several opportunities for deductions that may not be available if you file separately. These include deductions for mortgage interest and charitable contributions, among others.

Filing taxes jointly offers numerous benefits over filing separately that many people are unaware of until they actually go through the process themselves. If you’re married and deciding whether you should file together this year, consider these little-known perks that come with filing jointly. You might be surprised at just how much money you could save! From taking advantage of spousal IRAs and increased personal exemptions to earning extra credits and more — there are plenty of reasons filing jointly can be beneficial. But it is important to do your research (and perhaps consult with a tax professional), since each situation is different.

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If you’re considering becoming a homeowner, these three reasons could convince you you’re making the right move.  

Making the choice to buy a home is a big decision. You want to ensure you’re doing it at the right time. But, how do you know when that is? Here are three big reasons why you might want to move forward this year with the purchase of a property of your own.

1. Home prices may fall

Home prices skyrocketed during the early stages of the COVID-19 pandemic. This was due to high demand caused by low mortgage rates and due to limited supply, as many sellers were reluctant to put their properties on the market.

But, many experts are predicting home prices will fall this year. In fact, Moody’s Analytics predicts around a 5% drop in prices. Fears of a possible recession and of high mortgage rates could cause demand to drop and prices to plummet.

If prices fall, you should be able to get a good deal on a home of your own. Since it can be hard to predict exactly how the housing market will do in the long term, taking advantage of a temporary downturn in prices could be an opportunity worth seizing.

2. Mortgage rates may level off

Mortgage rates have increased dramatically throughout the past year as the Federal Reserve raised interest rates. While the Fed is likely to continue raising rates at least in the short-term, it’s likely that mortgage rates won’t continue to increase at the same pace as they did in 2022, since at some point rates will become so high that lenders won’t be able to find borrowers at all.

There are also some early signs that inflation may be cooling or that a recession may be coming — and if either of those things happens to be the case, then the Fed may stop raising rates or even start reducing them again. This could bring mortgage rates back down.

The reality is, even though rates are higher right now than they were during the heart of the pandemic, this doesn’t mean you shouldn’t buy a house in 2023. Rates remain reasonable by historical standards and if you buy this year, you can always refinance if they happen to go down in the future. If they keep going up, on the other hand, you don’t want to find yourself lamenting the fact you could have gotten a better deal in 2023 when you had the chance.

3. You’re financially ready to buy

Finally, the last and most important reason to buy a house in 2023 is because you are financially ready to do so.

Homeownership is almost always a great investment if you buy a house comfortably within your budget when you are in good financial shape. That’s because when you own a house, you acquire an asset with each payment you make rather than just paying rent. Homeowners tend to end up with a higher net worth over time, thanks to the equity they acquire and the fact property values usually go up over the long term.

For these big reasons, if you are in a good financial position and planning to stay put for a while, you should seriously consider moving forward with a home purchase this year.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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It’s a trap you don’t want to fall into. 

If money is tight, or if you’re saving up for different financial goals, then you may not want to spend money on extra expenses. As such, you may be inclined to try to keep your life insurance costs to a minimum. And that could mean only insuring one parent in a two-parent household.

But on a recent podcast episode, Suze Orman said that one of the biggest mistakes she sees people make when it comes to life insurance is not buying coverage for both parents when there’s a child involved. And that’s a mistake you should make every effort to avoid.

You don’t want to fall into a common trap

It’s often the case that when there are kids in the mix, one parent becomes the sole breadwinner for the household while the other becomes a stay-at-home parent, at least until the children involved are old enough to attend school. And in many situations, this decision doesn’t just make life easier — it makes financial sense.

The cost of childcare has soared over the past number of years. If you have a parent who’s not such a high earner, and you have multiple children who aren’t yet school-aged, you may find that the cost of daycare virtually wipes out that parent’s income. And in that case, what’s the point of rushing to daycare on a daily basis and spending all that money to only come away with a miniscule amount of money each month?

Now in that scenario, you might assume it only pays to buy life insurance for the working spouse. After all, the non-working spouse isn’t earning an income. So if that spouse were to pass away, your family wouldn’t be in a worse financial situation, right?

Well, not necessarily. If your non-working spouse is a full-time caregiver to your children, and then they’re no longer around, you’ll suddenly need to pay for care. And that could eat up a large chunk of your salary.

Here’s another way to think about it. Let’s say it would cost $24,000 a year to put your two young kids into a full-time daycare facility so you can work full-time (sadly, this number is a lowball estimate in some parts of the country). Meanwhile, let’s say you earn a $75,000 salary your family can live comfortably on in the absence of having to pay for childcare.

If your caregiving spouse dies, suddenly, you’re looking at spending almost one-third of your income on daycare costs. That changes your financial picture a lot.

A lack of earnings shouldn’t mean a lack of insurance

You may not need to buy the same amount of life insurance for a non-working spouse as a working spouse. But that doesn’t mean you should forgo coverage for a spouse who stays home and looks after the kids.

Losing that spouse might not mean losing an income. But it could mean incurring a host of hefty expenses. And at a time when you’re grieving the loss of a loved one, the last thing you need are financial worries as well.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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These mistakes will do a number on your retirement savings. 

Many people use 401(k)s and individual retirement accounts (IRAs) to build their retirement savings. When used correctly, these can be a great way to invest for the future while saving on taxes. But there are some common mistakes that can cost you thousands, or even hundreds of thousands.

Humphrey Yang is a former financial advisor, so he has firsthand experience of where people go wrong. In a recent video, he shared five big retirement account mistakes to avoid.

1. Not actually investing

Some people don’t realize that contributing to a retirement account is only the first step. For your money to grow, you also need to choose investments. Otherwise, you’ll just have money sitting around, not growing at all.

Your investment options will depend on the retirement account you have. With a 401(k), the plan provider decides what your options are. These often include mutual funds and target-date funds. IRAs offer almost any type of investment, including individual stocks.

Yang recommends broad, diversified exchange-traded funds (ETFs) and index funds. Both are good choices that will get you a balanced portfolio with a large number of stocks.

2. Skipping the Roth IRA

Traditional 401(k)s and IRAs allow you to make tax-deductible contributions. You then pay taxes on withdrawals in retirement. Roth IRAs, on the other hand, don’t let you deduct contributions on your taxes. However, withdrawals in retirement are tax-free.

Many financial advisors, Yang included, recommend contributing to a Roth IRA to have tax-free money in retirement. Suze Orman is another popular financial advisor who loves Roth IRAs.

IRAs and Roth IRAs each have their advantages, and the right choice depends on your situation. Some like to evenly split their traditional IRA and Roth IRA contributions. That’s an easy solution if you’re not sure which one is better for you.

3. Withdrawing money early

It’s never recommended to look at your retirement savings as money you can tap into at any time. The rule with retirement accounts is that if you take out money before age 59 1/2, it’s considered an early withdrawal. The early withdrawal penalty is 10%.

That means if you take out $100,000, there goes $10,000 right off the top. And if you’re withdrawing from a 401(k) or IRA, you’ll also need to pay income taxes on the withdrawal.

There are some exceptions, like withdrawing from an IRA to pay for college expenses or a first-time home purchase. But for the most part, it’s best to look at retirement accounts as money you won’t touch until you’re at least 59 1/2.

4. Investing too conservatively

When you’re young, you should have a growth-oriented portfolio. You can do that by either picking quality individual stocks or putting your money in stock-heavy investment funds. If stocks don’t make up most or all of your portfolio, it will grow much more slowly, and you’ll end up with far less money when you retire.

As you near retirement, you can shift to a more conservative asset allocation. Fixed-income assets, such as bonds, are a good way to reduce volatility in your portfolio.

5. Paying too much in fees

Investment funds have fees, but it’s important to choose funds that don’t overdo it, because they can significantly reduce your returns. Yang says that fees of 0.5% to 1% are entirely too much.

He suggests investing in index funds that charge you less than 0.1%. This kind of savings makes a big difference in your returns, and that difference continues getting bigger as your portfolio grows. Fortunately, the top stock brokers normally provide a variety of low-cost investment funds.

Yang provides some great advice on mistakes to avoid with your retirement accounts and what to do instead. If you follow these tips, your retirement savings will grow more quickly and you won’t incur any unnecessary extra costs, like hefty fees or early withdrawal penalties.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Lyle Daly has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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