Monday, March 29, 1999


Federal, state taxes not in sync

        Question: I'm married and found my federal taxes come out lower when I file jointly. However, if I use that same filing status for state, I pay more, offsetting the federal savings. So I end up having to file married separately, paying a higher federal to reduce my state. Am I missing something, or is it just a penalty for living in Ohio? — A.P., West Chester

        Answer: Rob Bult, senior tax manager at Deloitte & Touche LLP in Cincinnati, says you should not think of your federal and Ohio taxes in a win-lose relationship. Instead, congratulate yourself for smart tax plan ning. What you describe is one of the many examples of how federal and state governments don't always act in harmony.

        Ohio requires that you follow the same filing status as your federal return. It applies the same graduated income tax rate schedule regardless of your filing status. Under this system, a married couple, both working and filing a joint return, may pay higher taxes in Ohio since the second income is added on top of the first income and taxed at higher marginal rates. Ohio does provide a Joint Filing Credit up to $650, but this generally does not offset the additional tax.

        Federal taxes, however, have different graduated rate schedules for each filing status. As a married couple, you can file joint or separate returns. When filing separately, each spouse is allocated one-half of the joint tax rate schedule. If each spouse earns the same amount and has the same deductions, their combined federal taxes are generally the same when filing joint or separate returns.

        Therefore, married couples, where each spouse has about the same income and deductions, should calculate their federal and Ohio taxes using the joint and separate filing status. Choose the method that results in the least combined tax. If the income is uneven, see your tax adviser to look for ways to spread deductions to the spouse with the higher income.

        If you have already filed a joint return for 1998, you have until April 15 to amend your federal and Ohio returns and change the filing status.

        — Compiled by Amy Higgins

        Readers should consider the advice from the Money Panel as general information only. Investors should seek the help of professionals on questions regarding their own portfolios because circumstances might vary.


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