Assume you’re recently married and getting ready to file your first joint tax return. One of you has to choose being the “Taxpayer” or “Primary Taxpayer”. The IRS does not label the other of you “Co-Taxpayer”, but “Spouse” or “Secondary Taxpayer”, unnecessary and hierarchical descriptors that date back to generations when women were not predominantly part of the workforce and did not generally pay income tax based on their own earnings history.
That’s okay, you think to yourself. This year my spouse can be “The Taxpayer” and next year we’ll switch and he can be “Spouse”. Not so fast. While theoretically possible, the IRS computer systems are not set up to handle switches from “Taxpayer” to “Spouse” or from “Secondary” to “Primary” Taxpayer.
“No problem,” you shrug. “I can spot the silver lining here. If I am not “The Taxpayer”, but merely a “Spouse”, then surely I cannot be responsible for the tax liability related to my spouse’s earnings. Ignorance is bliss!” No such luck. If you file your tax return under the Married Filing Jointly status (MFJ), you are jointly and severally liable for tax on both your and your spouse’s income. The concept here is that if you are filing a joint return, you are both benefitting from your joint income, no matter which one of you earns it. So you are both liable.
“Hmmm,” you think. After all, you have curtailed your work recently as you and your spouse are new parents and, per mutual agreement, you are the one who has assumed primary parenting responsibilities during the work day. Then you brighten as you process the concept of joint and several liability. Logic would dictate that if liability of income tax is joint and several, then the income itself would in a sense be joint and several too. You’re not worried about the actual pay check, because your loving spouse deposits this into your joint account which seems fair to you. But what about your retirement? Can’t you title your spouse’s retirement account in joint name if this is something to which you both agree? Or Can’t you each contribute to a retirement account like a 401k based on one spouse’s earnings?
“NO!” you hear the IRS yell at you. Retirement accounts are INDIVIDUAL. After all, the “I” in IRA stands for “Individual”. All 401ks and other employer related retirement accounts are individual and you have to be employed to contribute to them. You can contribute to an IRA (Individual Retirement Account) based on spousal income, but not an employee retirement account.
You sigh in frustration. At least you can contribute to your IRA and get your tax deduction based on your modest earnings from your part-time employment that you have arranged since the birth of your child. “NO!” The IRS screams again. Your spouse is deemed a high earner and therefore you cannot receive a tax deduction due to his earnings.
“How is this possible?” your inner voice bellows. “If retirement accounts can only be in individual name, how can another individual’s earnings impact my ability to contribute to my retirement account?”
“Duh!” The IRS mocks you. “Your spouse can receive a tax deduction for his contributions to his 401k regardless of his income. You cannot because you contribute to an IRA which is subject to a different set of rules.”
“I give up!” you explode, trying to subdue your exasperation and not wake your baby, sleeping in the next room.
“Of course, you give up” you imagine you hear your Congressperson explain. After all, Congress writes tax legislation related to retirement plans. “We have made these rules purposely so complex and confusing that you wouldn’t question them.”
But we cannot give up. We need Congress to update IRS rules so that there is no longer a hierarchy of taxpayers and so that we have a consistent set of rules for retirement contributions and tax deductibility. We “Spouses” and “Secondary Taxpayers” need a seat at the legislative table.