Once per year, married couples have the option to get a short, amicable separation – at least, as far as the IRS is concerned. If you’re married, you have a decision to make when tax time rolls around: Should you file jointly or separately?
Choosing a filing status does not reflect upon your marriage – it’s about making the best decision for your financial situation. Since each method of tax filing has its own set of benefits, you may find that filing separately benefits both you and your spouse more than filing jointly. Or, you may find that the opposite is true, and filing jointly is the best option.
Benefits of Filing Separately
1. Extra Deductions
Joint filing is almost always simpler, and it often results in a bigger tax break. However, if you and your spouse are savvy about your deductions (and have a lot of them), filing separately can save you money. Your eligibility to deduct major expenses often hinges on whether your expenses exceed a set percentage of your income. By separating your salaries, you may have a better chance of meeting such income requirements.
- Medical bills must exceed 10% of your income before you can deduct them.
- Employee business expenses, such as mileage, along with other miscellaneous deductions, must exceed 2% of your income to be deductible.
- Casualty losses (such as damage to your home or your car from a storm) or the theft of an expensive item are eligible for deduction, but only after 10% of your AGI and an additional $100 for each individual loss have been subtracted from the amount of all losses not reimbursed by your insurance company.
2. Protection From Tax Debts or Defaulted Student Loans
Hidden financial troubles (such as old debt and tax issues) often aren’t revealed until tax time. If you or your spouse have old tax debts, the IRS can seize money from your refund. The government can also garnish a refund to pay off any defaulted student loans.
One benefit to filing separately is that your and your spouse’s refunds are processed separately. If your spouse’s refund is subject to seizure, but yours is not, you can protect it by filing separately. If you file jointly, you cannot. Also, if one of you will have a tax bill you can’t cover, filing separately protects the other spouse from salary garnishment and property seizure.
3. Protection From Prosecution
Hopefully you don’t face this situation, but if you believe your spouse will falsify a tax return, you can get protection from audits and prosecution by filing your tax return separately. If you file jointly and your spouse has falsified or otherwise “edited” the tax return, you can be held equally liable because you signed off on the joint return. Though the IRS offers “innocent spouse” protection in cases of tax fraud, you’ll face the challenge of proving that you had no knowledge of the fraudulent activity.
Benefits of Filing Jointly
1. Getting Credit for Your Family
While filing separately makes sense in some situations, only filing jointly makes you eligible for family-related tax credits and deductions. If you file separately, you may pass up your chance to claim these well known benefits:
- The American Opportunity Credit (for college costs) and other education tax deductions and credits
- The Earned Income Tax Credit
- Student loan interest deductions
Additionally, when filing separately, you may not be eligible for the Child and Dependent Care Credit and the Adoption Credit. Furthermore, your deductions for personal exemptions, itemized deductions, the Child Tax Credit, and capital losses are cut in half. Losing deductions can significantly increase your tax liability – especially if you have children – and make married filing jointly the more prudent choice.
2. Retirement Contributions
If you took a capital loss last year or if you want to make tax-deductible contributions to an IRA retirement account, you’ll find more generous requirements when you file jointly as opposed to separately. Based on your adjusted gross income, the IRS determines maximum IRA contribution limits, and after crunching those numbers, joint filing almost always looks better.
3. Itemizing Your Returns
Itemizing your taxes is more complicated, but sometimes yields more deductions. If you choose to file separately, and one of you itemizes, then you both must itemize. In other words, one of you can’t take the standard deduction while the other itemizes. Often, in this case, you’ll find that one of your returns suffers – which could mean a bigger tax bill overall.
If you’re not sure which method of filing is best for you, change your filing status in your tax preparation program to determine which gives you a lower tax bill. Keep in mind that unless you fall under one of the special situations listed above, most couples are better off filing jointly.
While many divorcing couples file separately, if you’ve been living apart for most of the year, you may qualify to file as head of household (or even single), which can make more credits and deductions available than married filing separately.
Overall, major purchases and life events usually make the difference in which filing status is best for you. If you think it’s the right year to file separately, make sure you have a professional prepare your taxes, or at least review your self-completed forms. And keep in mind that the IRS will allow you to later amend your filing status to married filing jointly if you originally filed separately, but not the other way around.
Have you ever filed as married filing separately? How did it work?