Married couples in Iowa have choices with filing statuses. I wrote about these options last week, and have written before about some of the oddities of these filing statuses, such as the requirement to allocate deductions.
Today I want to answer a basic question: why is it almost always better for married couples to file as married filing separately instead of married filing jointly on their Iowa return?
Tax Brackets
In Iowa, there’s just one tax bracket, regardless of filing status, and the percentage of tax owed escalates quickly as income escalates.
Single people, head of household, married filing jointly and married filing separately all use the same tax bracket.
So in a situation where two people who are married both have income, it’s better to file separately so each spouse is taxed only on their share of the income, at a lower point in the tax bracket, rather than filing jointly and being taxed together.
Example:
Annie and Alex are married. Annie’s taxable income is $30,000. Alex’s taxable income is $50,000. If they file a joint Iowa tax return, they’ll be taxed on $80,000.
If they file separately, Annie will be taxed on her $30,000, while Alex will be taxed on his $50,000.
Because Iowa’s tax brackets are highly progressive, Annie and Alex will almost certainly be better off being taxed separately in the lower ranges of the tax bracket.