Which spouse takes deductions?
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Which spouse takes deductions?
Help me understand the tradeoffs, please. I'll try to keep it generic and to the point:
Spouse 1 grosses around $180k has no major deductions beyond taxes and maxed retirement.
Spouse 2 grosses around $45k and contributes less to retirement (less desirable plan) but also has family medical coverage and maxed dependent care FSA.
All finances are shared without issue.
Are we screwing up by having spouse 2 take both medical and FSA deductions? Spouse 1 is above the FICA threshold so each marginal dollar is taxed less, therefore we put the deductions on Spouse 2 to save more taxes, but is that a terrible idea when we eventually do take SS?
I'm not sure how to quickly quantify the trade off, nor do I need to optimize this to the bitter end, but looking to avoid making a large mistake especially with the larger dependent care FSA limits coming up. Thanks!
Spouse 1 grosses around $180k has no major deductions beyond taxes and maxed retirement.
Spouse 2 grosses around $45k and contributes less to retirement (less desirable plan) but also has family medical coverage and maxed dependent care FSA.
All finances are shared without issue.
Are we screwing up by having spouse 2 take both medical and FSA deductions? Spouse 1 is above the FICA threshold so each marginal dollar is taxed less, therefore we put the deductions on Spouse 2 to save more taxes, but is that a terrible idea when we eventually do take SS?
I'm not sure how to quickly quantify the trade off, nor do I need to optimize this to the bitter end, but looking to avoid making a large mistake especially with the larger dependent care FSA limits coming up. Thanks!
Re: Which spouse takes deductions?
Unless you are filing taxes separately it all ends up on the same tax return. Married Filing Separately is rarely advantageous.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Which spouse takes deductions?
If you are MFJ, I think I'd look at the entire picture holistically. The last dollar is taxed at the same, highest marginal rate, regardless of who takes which deduction. In this case, both you and your spouse pay the same percent tax on the last dollar. Since these cafeteria plans reduce your wife's income for FICA purposes, it is true that she would receive less in the future. How much less is something that you would have to calculate. If you have comparable cafeteria plans, it would make sense to fund them from your income, particularly since you are over the threshold for social security taxation, and it would save a little on the Medicare surcharge.
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Re: Which spouse takes deductions?
To clarify we are MFJ.
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Re: Which spouse takes deductions?
Yes but FICA is based on gross is it not?
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Re: Which spouse takes deductions?
FSA funds are not subject to FICA tax, hence my curiosity.Bogle_Bro wrote: ↑Tue Mar 23, 2021 8:10 pmYes but FICA is based on gross is it not?
Re: Which spouse takes deductions?
I've seen 4 cases in over 10 years of doing returns -- but I've done hundreds of returns. Don't recall the details on most. One was a situation where the spouses lived in different states and each worked in the opposite state; was an odd case - they told me up front that it was the best way to go but we checked it both ways anyway just to make sure.jackbeagle wrote: ↑Tue Mar 23, 2021 8:06 pmI have yet to have someone provide an actual situation in which MFS is advantageous to MFJ. I can't even think of one.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Which spouse takes deductions?
Certain cafeteria plans, like flex spending accounts, etc. come out pre-tax. They reduce your gross income.Bogle_Bro wrote: ↑Tue Mar 23, 2021 8:10 pmYes but FICA is based on gross is it not?
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Re: Which spouse takes deductions?
Also if one spouse is subject to income based student loan repayment amounts. Not necessarily a tax savings but changes student loan payments and forgiveness.jebmke wrote: ↑Tue Mar 23, 2021 8:13 pmI've seen 4 cases in over 10 years of doing returns -- but I've done hundreds of returns. Don't recall the details on most. One was a situation where the spouses lived in different states and each worked in the opposite state; was an odd case - they told me up front that it was the best way to go but we checked it both ways anyway just to make sure.jackbeagle wrote: ↑Tue Mar 23, 2021 8:06 pmI have yet to have someone provide an actual situation in which MFS is advantageous to MFJ. I can't even think of one.
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Re: Which spouse takes deductions?
Ah!MindBogler wrote: ↑Tue Mar 23, 2021 8:13 pmCertain cafeteria plans, like flex spending accounts, etc. come out pre-tax. They reduce your gross income.Bogle_Bro wrote: ↑Tue Mar 23, 2021 8:10 pmYes but FICA is based on gross is it not?
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Re: Which spouse takes deductions?
In certain cases this can be incredibly advantageous, as well. Imagine if you are hovering near some income threshold, like the phaseout for traditional IRA contributions. Maybe adding a flex spending account brings you under that limit. In this case you save money on the things you spend on from the account, and gain back access to a valuable savings vehicle.Bogle_Bro wrote: ↑Tue Mar 23, 2021 8:17 pmAh!MindBogler wrote: ↑Tue Mar 23, 2021 8:13 pm Certain cafeteria plans, like flex spending accounts, etc. come out pre-tax. They reduce your gross income.
edit - fixed the quote block.
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Re: Which spouse takes deductions?
This is the example the came to my mind as well.lazynovice wrote: ↑Tue Mar 23, 2021 8:16 pmAlso if one spouse is subject to income based student loan repayment amounts. Not necessarily a tax savings but changes student loan payments and forgiveness.jebmke wrote: ↑Tue Mar 23, 2021 8:13 pmI've seen 4 cases in over 10 years of doing returns -- but I've done hundreds of returns. Don't recall the details on most. One was a situation where the spouses lived in different states and each worked in the opposite state; was an odd case - they told me up front that it was the best way to go but we checked it both ways anyway just to make sure.jackbeagle wrote: ↑Tue Mar 23, 2021 8:06 pmI have yet to have someone provide an actual situation in which MFS is advantageous to MFJ. I can't even think of one.
In most states if the one with the debt has significantly less income, it could make big difference.
Or if you're in a community property state, if the spouse with debt makes significantly more money, it almost definitely makes a big difference
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Re: Which spouse takes deductions?
Not sure of a fast way to determine it. Given the disparity in incomes, spouse 2 may end up claiming SS based on spouse 1’s earnings history anyway.dukeblue219 wrote: ↑Tue Mar 23, 2021 8:13 pmFSA funds are not subject to FICA tax, hence my curiosity.Bogle_Bro wrote: ↑Tue Mar 23, 2021 8:10 pmYes but FICA is based on gross is it not?
Re: Which spouse takes deductions?
I think the question is independent of income taxes, correct? This a question about reducing FICA taxes now with the trade off of potentially less social security later. I will leave the answer to that to one of the SS gurus as the answer does not seem obvious to me with the numbers involved.
Re: Which spouse takes deductions?
I would think that maxing spouse 2's retirement would have a bigger impact than being concerned about FICA.
Re: Which spouse takes deductions?
So, how much social security you're going to get is a little complicated. Fortunately everything is indexed to inflation so we can work the problem as if time is standing still.
Your top 35 years of contributions are considered. There's a yearly max which is indexed to inflation (142,800 in 2021). So each of your top 35 years, you're contributing somewhere between 0% and 100% of the yearly max. We'll call this your contribution percentage. Average your top 35 contributions percentages and you can start to calculate how much SS you'll get:
* The first 8.4% of average contribution percentage, 90% counts towards SS amount
* From 8.4% - 50.4%, 32% counts towards SS amount
* From 50.4% - 100%, 15% counts towards SS amount
So what's the ROI? Let's say you're going to die at 90, which means starting SS at 67 gives you 23 years of payouts, and starting it at 70 gives you 20 years of payouts at 132% of the level, which is like getting 26.4 years at the age-67 amount. So let's average those and assume we'll get 25 years of payouts.
So you pay in 7.65% of your income for 35 years and get a marginal 32% or 15% of that income back for 25 years.
Pay in = 7.65*35 = 268% of annual income
Pay out (32% bracket) = 32*25 = 800% of annual income = ~300% of what you put in
Pay out (15% bracket) = 15*25 = 375% of annual income = ~140% of what you put in
What this means is that if you're in the 32% "marginal SS contribution bracket," you are getting an instantaneous 200% return on your investment, and it keeps up with CPI from there. In the 15% bracket, you still get an instant 40% boost. Not bad!
The takeaway is that you absolutely, absolutely want to put enough into SS over your life to hit that "50.4% of the wage base on average" mark. Even if the SS rules change somewhat against you, you still come out way ahead.
Your top 35 years of contributions are considered. There's a yearly max which is indexed to inflation (142,800 in 2021). So each of your top 35 years, you're contributing somewhere between 0% and 100% of the yearly max. We'll call this your contribution percentage. Average your top 35 contributions percentages and you can start to calculate how much SS you'll get:
* The first 8.4% of average contribution percentage, 90% counts towards SS amount
* From 8.4% - 50.4%, 32% counts towards SS amount
* From 50.4% - 100%, 15% counts towards SS amount
So what's the ROI? Let's say you're going to die at 90, which means starting SS at 67 gives you 23 years of payouts, and starting it at 70 gives you 20 years of payouts at 132% of the level, which is like getting 26.4 years at the age-67 amount. So let's average those and assume we'll get 25 years of payouts.
So you pay in 7.65% of your income for 35 years and get a marginal 32% or 15% of that income back for 25 years.
Pay in = 7.65*35 = 268% of annual income
Pay out (32% bracket) = 32*25 = 800% of annual income = ~300% of what you put in
Pay out (15% bracket) = 15*25 = 375% of annual income = ~140% of what you put in
What this means is that if you're in the 32% "marginal SS contribution bracket," you are getting an instantaneous 200% return on your investment, and it keeps up with CPI from there. In the 15% bracket, you still get an instant 40% boost. Not bad!
The takeaway is that you absolutely, absolutely want to put enough into SS over your life to hit that "50.4% of the wage base on average" mark. Even if the SS rules change somewhat against you, you still come out way ahead.
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Re: Which spouse takes deductions?
Thank you, Swivel. Your full answer is exactly what I was hoping someone could provide. Perhaps it is my mid 30s age, but I have no sense for how earnings changes now will affect my eventual SS payouts (nevermind any political changes). Thanks!
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Re: Which spouse takes deductions?
Sure, and point well taken, but with young kids and a spouse working half-time, we've set our current $ priorities as they are (and we both have decent pension plans on top of the defined contrib plans). Not worried about our overall retirement plan, but where I feel comfortable with the pension, savings, and investment side, I just have no clue how SS actually works and don't want to leave easy money on the table when a few mouse clicks could shift it around.
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Re: Which spouse takes deductions?
You're probably doing it right.
Think the math was tricky so far? Keep in mind spouses get their benefit or 50% of their spouse's benefit, whichever is higher. (Technically they get their benefit, plus a top off to make it at least 50%).
The max benefit would be for Spouse 2 to pay $0 in FICA and Spouse 1's ROI goes up by 50%. If Spouse 2 is able to make it past the threshold, roughly after but close to 1st bend point, you'll take home more than if Spouse 2 paid in $0. But at what cost?
What is the *cough* marginal effective tax rate there? (Just kidding, leave that alone)
Think the math was tricky so far? Keep in mind spouses get their benefit or 50% of their spouse's benefit, whichever is higher. (Technically they get their benefit, plus a top off to make it at least 50%).
The max benefit would be for Spouse 2 to pay $0 in FICA and Spouse 1's ROI goes up by 50%. If Spouse 2 is able to make it past the threshold, roughly after but close to 1st bend point, you'll take home more than if Spouse 2 paid in $0. But at what cost?
What is the *cough* marginal effective tax rate there? (Just kidding, leave that alone)
Last edited by casualflower on Tue Mar 23, 2021 10:37 pm, edited 1 time in total.
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Re: Which spouse takes deductions?
If you're in the phaseout for the latest stimulus filing MFJ but not MFS, then MFS can win, depending on the number of kids and deductions.jackbeagle wrote: ↑Tue Mar 23, 2021 8:06 pmI have yet to have someone provide an actual situation in which MFS is advantageous to MFJ. I can't even think of one.
Re: Which spouse takes deductions?
Ooh, good point, I never had to consider that because my personal situation is one of much closer matched incomes than OP's. But then you have to consider: what if you get divorced before retirement? Spousal benefits can be retained, but with conditions.casualflower wrote: ↑Tue Mar 23, 2021 10:29 pm You're probably doing it right.
Think the math was tricky so far? Keep in mind spouses get their benefit or 50% of their spouse's benefit, whichever is higher. (Technically they get their benefit, plus a top off to make it at least 50%).
The max benefit would be for Spouse 2 to pay $0 in FICA and Spouse 1's ROI goes up by 50%. If Spouse 2 is able to make it past the threshold, roughly after but close to 1st bend point, you'll take home more than if Spouse 2 paid in $0. But at what cost?
And for households with two high earners, there's another can of worms, the maximum family benefit, that may take a chunk out of the combined payout, setting the marginal benefit to zero at the top end.
Social security is complicated.
Re: Which spouse takes deductions?
from Google search:
Formula for Family Maximum Benefit - Social Security:
www.ssa.gov › oact › cola › familymax
Search for: What is the maximum amount a family can receive from Social Security?
Is there a family cap on Social Security benefits?
One payment does not offset or affect the other. There is a maximum family benefit, however, a cap on the total amount a family can collect from Social Security on a single worker's earnings record (including spousal, children's and survivor benefits).
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Re: Which spouse takes deductions?
Will go read up on spousal benefits. Hadn't contemplated that part, thanks for chiming in. I'll pull both our SS statement and try to make heads or tails of our histories so far.casualflower wrote: ↑Tue Mar 23, 2021 10:29 pm You're probably doing it right.
Think the math was tricky so far? Keep in mind spouses get their benefit or 50% of their spouse's benefit, whichever is higher. (Technically they get their benefit, plus a top off to make it at least 50%).
The max benefit would be for Spouse 2 to pay $0 in FICA and Spouse 1's ROI goes up by 50%. If Spouse 2 is able to make it past the threshold, roughly after but close to 1st bend point, you'll take home more than if Spouse 2 paid in $0. But at what cost?
So, this I intentionally left out of the discussion for simplicity, but agreed that it is a consideration to not leave Spouse 2 with both low SS history and the smaller retirement accounts in that event. Stable family, married older, 2 kids and all but I know stuff happens. I'm trying to understand how all the math works before bringing in the external factors.
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Re: Which spouse takes deductions?
If you're married for at least 10 years, your spouse gets the same spousal benefits regardless of if you divorce (as long as they aren't married to someone else when they start to claim).
An *additional* consideration for spousal stuff is figuring out when you should start to claim benefits which depends in part on your age differential. Assuming your spouse will be using your benefit and your stay married, a spouse, unlike the primary earner, doesn't gain an increase in benefits by claiming later than full retirement age FRA. But they can't claim unless the primary earner is claiming. So, if the primary earner is inclined to delay to 70, that works great if the primary is 4-5 years older. But if they're the same age, then FRA probably makes more sense, otherwise Spouse B is missing out on their benefit without corresponding increases. And if the primary earner is *younger*? I dunno, someone's probably made a spreadsheet somewhere.
An *additional* consideration for spousal stuff is figuring out when you should start to claim benefits which depends in part on your age differential. Assuming your spouse will be using your benefit and your stay married, a spouse, unlike the primary earner, doesn't gain an increase in benefits by claiming later than full retirement age FRA. But they can't claim unless the primary earner is claiming. So, if the primary earner is inclined to delay to 70, that works great if the primary is 4-5 years older. But if they're the same age, then FRA probably makes more sense, otherwise Spouse B is missing out on their benefit without corresponding increases. And if the primary earner is *younger*? I dunno, someone's probably made a spreadsheet somewhere.
Re: Which spouse takes deductions?
The tax is usually less on a joint return. However, sometimes the tax is less on separate returns, for the reasons others have mentioned, as well as for other reasons.
Re: Which spouse takes deductions?
OP might want to use opensocialsecurity.com, see what happens if he lowers his PIA/increase his wife's PIA and vice-versa. Will at least give him an idea of the eventual effect on social security reducing FICA contributions now.Katietsu wrote: ↑Tue Mar 23, 2021 8:27 pm I think the question is independent of income taxes, correct? This a question about reducing FICA taxes now with the trade off of potentially less social security later. I will leave the answer to that to one of the SS gurus as the answer does not seem obvious to me with the numbers involved.