Iowa tax law throws unique wrinkles at taxpayers when it comes to filing options for married couples.
A married couple in Iowa can choose from one of 3 filing statuses:
- Married filing jointly
- Married filing separately on a combined return
- Married filing separately on separate returns
Married filing jointly is typically used only in cases where one spouse has income and the other spouse has no income. Otherwise, one of the “separate” statuses will almost always produce better results. This is because Iowa has just one tax bracket, which applies to all filing statuses. Filing separately allows spouses to split their income up and get taxed separately, thus producing a lower tax liability than filing jointly.
In this post, I want to focus on the differences between filing separately on a combined return, versus filing separately on separate returns.
In one word, the difference comes down to: liability.
Under both of the “separate” filing statuses, the ending tax liability will be exactly the same. The difference is, on a combined return, both spouses are liable for the contents of the return. With separate filings, each spouse is responsible only for the contents of their own return.
Example
Joe and Martha are a married couple. Both have taxable income, so they choose to file separate Iowa tax returns. If they choose to file separately on a combined return, one spouse will use column “A” of the Iowa 1040, while the other spouse will use column “B.” Income and deductions will be claimed or allocated according to Iowa law, and the tax liability for each column will be calculated separately, and then combined into one number at the end. Let’s say Joe’s tax liability comes to $2,000 and Martha’s comes to $1,500. The bottom line of their Iowa 1040 will show a tax liability of $3,500, and Joe and Martha will be jointly liable for that liability.
Now let’s say they choose to file separately on separate returns. All calculations are exactly the same, and the ending tax liability will be the same. The difference is, Joe will be liable only for his $2,000 of taxes and the contents of his own return, and Martha will be liable only for her $1,500 of taxes and the contents of her return.