If you’re married and receiving a public pension or social security in Missouri, it may make sense for you to file your tax return as married filing separately instead of jointly. It sort of defies the conventional wisdom of tax preparation, but it’s worth checking out.
Usually, as in 99.5% of the time, a married couple is better off filing a joint return, at least as far as their federal tax return is concerned. But often times, especially when there are no dependents claimed on the return, the difference is negligible if anything. It’s just natural to file a tax return jointly because it’s easier and usually cost effective. But most tax software programs that do a “married filing jointly (MFJ) vs married filing separately (MFS)” comparison analysis usually don’t include the state results in the analysis.
If you live in Missouri, and you both have a public pension, you’ll want to take a closer look at the potential difference. Here’s why: If you’re married and your combined income exceeds $100,000, your public pension exemption becomes limited. If you change your status to MFS, you each are allowed income of $85,000 before any limitations kick in. The higher your income, the more you’re going to want to consider splitting your return. Now remember, this works for public pensions and social security, if you have a private pension, the rules are different and there’s no tax benefit to filing separately.
Public pensions are pensions from government organizations such as the military, the postal service, or state or local governments. Teacher pensions are considered to be public pensions. Private pensions are from corporations like Boeing or Nestle. If you’re not sure what kind of pension you have, call your plan administrator.
Let’s say for example that you and your wife are retired school teachers–meaning that you both have public pensions. Your income is $70,000 and your wifes’ is $74,000. Combined, you’re well above the $100,000 limitation. Because you’ve exceeded the income limitation, your pension exemption is limited to $23,406. If you filed separately, the income limitation would be $85,000–which you’d both be under, and you’d each get a pension exemption for $33,703 (or a total of $67,406.) That’s a difference of $44,000! Compute that out at the 6% tax rate for Missouri and you’ll have saved $2,610.
That’s a big difference. Using the standard “MFJ vs MFS” calculator for the federal return, I showed that with the married filing separately status, you’d owe an extra $12. I’ll gladly pay $12 to save $2600. But without doing the extra work, I wouldn’t have known there was that huge difference.
While the take home tax software products are really good, this is one of those situations where you can miss out on a major tax savings. You have to know about the public pension exemption. You have to know about the different income limitations. And most importantly, you have to actively set up and do the work to make sure you don’t miss this opportunity. If you think you might be missing out on important deductions like this one, maybe it’s time to set up an appointment with a professional.
