High income married taxpayers should consider filing separate returns for 1991.

• Author: Bernheim, Irving B.

In certain situations, married taxpayers can benefit by filing separate federal income tax returns. While most of the opportunities available have existed for a few years, one is new for 1991. As a result of a change created by the Revenue Reconciliation Act of 1990, married taxpayers with adjusted gross income (AGI) in excess of $100,000 are generally required to reduce their itemized deductions by 3% of that excess. This change may create n opportunity for high income married taxpayers to reduce their federal income tax liability by filing separate returns.

Married taxpayers should consider filing separate returns if one or more of the following conditions exists.

* The couple has AGI in excess of $100,000.

* Their personal exemptions are at least partially phased out.

* their medical expense deductions are reduced by 7.5% of AGI.

* their miscellaneous itemized deductions are reduced by 2% of AGI.

Reduction of

itemized deductions

For tax years beginning after 1990 and before 1996, married taxpyaers with AGI in excess of $100,000 are generally required to reduce certain of their itemized deductions by 3% of that excess. The maximum reduction is 80% of allowable itemized deductions, other than the deductions for medical expenses, investment interest, casualty losses or wagering losses to the extent of wagering gains.

Example 1: A married couple has itemized deductions that consist of $8,000 in real estate taxes and $15,000 in home mortgage interest; their AGI is $175,000. Their allowable itemized deductions for 1991 wouldbe reduced by $2,250 to $20,750 [($8,000 + $15,000) - (($175,000 - $100,000) x 0.03)]. Miscellaneous itemized deductions are reduced by the 2% limitation before applying the reduction. The threshold amount is reduced to $50,000 for married individuals filing a separate return.

A married couple can mitigate the effect of the 3% rule if they strategically assign income and itemized deductions between them on separate returns. See Example 2 on pages 102-103.

As example 2 points out, several tax planning items must be taken into consideration.

* If separate returns are filed, what will be the taxpayer's marginal tax rate? A deduction will yield the greatest benefit to the party in the higher marginal tax bracket.

* Can income be shifted between spouses?

* Does the spouse with the lower taxable income have the ability to pay the medical expenses, home mortgage payments and real extate taxes? As noted in the example, in order for...