The Top 10 Tax Mistakes That Couples Make, and How To Avoid Them

While you’re mining this year’s tax instructions for savings on deductions and credits, don’t forget the special rules that come with your marital status. The so-called “marriage penalty” affects only couples with roughly equal incomes that year. Everyone else gets an Ozzie-and-Harriet “marriage bonus.” Here are the top 10 questions you and your spouse should ask yourselves in order to make sure you’re getting your maximum tax benefits:

1. Do you have two retirement plans? If not, start them now. When one spouse isn’t working, the other can fund an Individual Retirement Account in his or her name. You can salt away up to $5,000 for a spouse under 50, and $6,000 if your spouse is 50 or older. Contributions to a traditional IRA made by April 18 are deductible on your 2010 return. (A Roth IRA isn’t deductible; instead, its earnings accumulate tax free.)

2. Did a spouse who’s been out of the workforce get a job last year? The second income could push you both into a higher bracket. In that case, you might not have had enough withheld for taxes last year. Fill in your tax forms right now so you’ll know how much money you’ll have to raise by the filing date, April 18 (for calendar reasons, you get three day’s grace this year).

Whenever joint income shoots up, employees should revisit their W-4 forms, which tell their companies how much to withhold from each paycheck. Do the same if deductions increase — for example, if you welcome a new child.

3. Did you marry or divorce last year? Don’t file with a name that doesn’t match your Social Security number. It will delay your refund while the IRS clarifies your status, says Larchmont, N.Y. tax attorney Julian Block, author of Julian Block’s Tax Tips for Marriage and Divorce. If you changed your name, notify the Social Security Administration. Until the change is registered, file your tax returns under the name you held before.

Your marital status on December 31 dictates your tax status for the entire year. A wedding that day gives you a joint return, a divorce takes it away.

4. If you married last year, did each of you sell a home that you owned individually? If so, you both can exclude as much as $250,000 in profits when you file your joint return — $500,000 in all.

5. Did your spouse die within the past three years? Don’t make the mistake of filing as a single person or head of household when you don’t have to. You’re entitled to file a joint return for the year your spouse dies. If you have a dependent child and remain unmarried, you also get favorable joint-return rates for the two years after your spouse’s death. Your 2010 taxes will be forgiven if your spouse in the military died last year in a combat zone or as a result of a terrorist attack or military action.

6. Are you a low-earning spouse who suffered high out-of-pocket medical expenses last year? Consider the possibility of filing separately from your spouse. The tax code lets you deduct only the qualified medical expenses that exceed 7.5 percent of your adjusted gross income. On a joint return, that might not amount to much, but it could be significant on an individual return, Block says. Likely candidates for “married filing separately” are spouses without health insurance or those who entered a nursing home. Nursing home, home-care costs, and private nursing are generally deductible as a medical expense.

Married couples filing separately lose a number of tax breaks, including the dependent-care credit and student loan interest deduction. Your top tax rate might be higher, too. To make this strategy worth your while, the expenses have to be large enough to exceed the cost.

In community property states, separate tax returns generally make no financial sense. Your joint income has to be divided equally, so you both report the same amount.

7. Do you suspect that your spouse is diddling the IRS? Don’t sign the tax return. If you do, you become fully liable for that year’s unpaid tax, including penalties. If the fraud is uncovered and your spouse takes off for Venezuela, the IRS will come after you for the money. Unfortunately, it’s hard for suspicious spouses to say “no” to joint filing unless the marriage is already coming apart. If that’s the case, however, don’t pick up the pen. You’re liable for unpaid taxes on joint returns even after you divorce.

If the IRS audits the return and demands more money, the “innocent spouse” rule might save you from paying the arrears. But “innocent” is hard to prove. You have to show that you didn’t know about the lies, had no reason to know (for example, you weren’t living higher on the hog than your incomes would normally allow), and that it would be unfair to make you pay. In fiscal year 2010, more than 50,000 spouses applied for relief. Only 15 percent of them got entirely off the hook; 13 percent escaped with paying only part of the tax. Everyone else had to ante up.

8. Are you married but living apart from your spouse? You’re not stuck with the higher cost of “married, filing separately.” You can file as head of household if you meet the following conditions: you were separated for the last six months of 2010, you had a separate residence, paid more than half the cost of its upkeep, made a home for your dependent child for more than half the year, and never, ever, let your spouse stay overnight — not even on the couch.

9. Are you a same-sex married couple? Don’t make the mistake of filing a joint federal tax return. Even if your names could signal either sex (say, Cameron and Mitchell), the IRS could check your gender using your Social Security number. Married or not, you can claim your mate as a dependent on your federal return, if you’re supporting him or her. Your partner has to have had a reportable income of less than $3,650 last year and lived with you for the entire year except for short absences.

10. Can you take a medical deduction for the cost of divorce if your psychiatrist says that your marriage made you sick? Nice try but no cigar. Courts have already heard this one (in fact, they’ve heard practically every excuse for not paying taxes). They’ve said that getting out of a bad marriage is reward enough.