When can I file under 'Married filing separately'

[AI-2020]

My wife and I live in NJ with our two kids. We are planning to sell in 2021, some of our initial stock options that we received from our start-up (fully vested and exercised more than a year ago). I have significantly more number of stocks than my wife. We would like to minimize our NJ State Income tax liability, as NJ will tax all the gains from our stock sales as regular income for NJ state income tax purposes. I plan to move to either FL or TX for say the whole of 2021, while leaving my wife and kids in NJ. My wife and I will sell our respective stocks while I live in FL or TX for 2021 and she lives in NJ with the kids.

Given this, can we file as 'married filing separately', where my files NJ state tax return (in addition to Federal), and I file a FL or TX state tax return (in addition to Federal)? Per my calculations, our overall Income tax liability (Fed + State) is significantly lower if we file as 'married filing separately', instead of 'married filing jointly', and maintaining status quo of living in NJ. We have always filed as 'Married Filing Jointly' so far.

The Capital gains from our stock sale is likely to be significant. So, some of the factors around a higher income tax rate for Fed, some of the usual deductions not being available etc. get far outweighed by the amount of Income Tax we will end up paying NJ State for the stock sales. 

[VolvoGirl]

I didn't follow all of that and can't address your situation but you can choose to file Married filing Separate or Joint any year. You can even switch each year.  But Joint should be better.

Heres some info you might not be aware of.....

Joint has the lowest tax rates and the highest Standard Deduction.   And if you are in a Community Property state MFS gets tricky to figure out.  Here's some things to consider about filing separately……

In the first place you each have to file a separate return, so that's two returns.  And if you are using the Online version that means using 2 accounts and paying the fees twice.  

Many people think they come out better when filing Married Filing Separate but they are probably doing it wrong.  If one person itemizes deductions then the other one must itemize too, even if it's less than the standard deduction, even if it is ZERO!  

And there are several credits you can't take when filing separately, like the

EITC Earned Income Tax Credit

Child Care Credit

Educational Deductions and Credits

And contributions to IRA and ROTH IRA are limited when you file MFS.

Also if you file Married Filing Separately up to 85`% of your Social Security becomes taxable right away even with zero other income.

See …….

https://ttlc.intuit.com/community/married/help/is-it-better-for-a-married-couple-to-file-jointly-or-...

You might be able to file Joint federal and separate for state.  Depends on the state.  That is tricky to do but possible.

[VolvoGirl]

By the way, Florida and Texas do not have an income tax so you don't need to file state returns there.

[AI-2020]

Thanks for your advice. So, looks like the question I need to ask is if I can file under 'Married filing jointly' for Federal while filing under 'Married filing separtely' for NJ State, only for my wife.

[Anonymous]

if you intend to return to NJ after 2021, NJ would deem your domicile and thus the state to pay income taxes to be NJ for 2021.

from NJ individual income tax instructions

Domicile. A domicile is the place you
consider your permanent home—the
place where you intend to return after a
period of absence (e.g., vacation, business assignment, educational leave). You
have only one domicile, although you
may have more than one place to live.
Your domicile does not change until you
move to a new location with the intent to
establish your permanent home there and
to abandon your New Jersey domicile.
Moving to a new location, even for a long
time, does not change your domicile if
you intend to return to New Jersey.

as for federal MFS vs MFJ you usually will pay more federal taxes than if you use another filing status for which you qualify. Also, if you file a separate return, you can't take the student loan interest deduction, the tuition
and fees deduction, the education credits, or the earned income credit. You also can't take the standard deduction if your spouse itemizes deductions.

[AI-2020]

This is indeed helpful. Thank you so much.