Generally speaking, your marital status is determined as of December 31 of the tax year. If you were married on or before that date, the IRS considers you married for the entire year. If you are 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 the state of your marriage – but, rather, it is 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.
Here’s everything you need to know about choosing whether to file jointly or separately. For help with other issues, check out our complete Tax Guide.
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 adjusted gross income (AGI) before you can deduct them.
- Employee business expenses, such as mileage, along with other miscellaneous deductions, must exceed 2% of your AGI 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 refund and your spouse’s refund 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 are each liable for the tax debt on a joint return.
Also, if one of you will have a tax bill you can’t cover, filing separately protects the other spouse from IRS collection procedures, such as salary garnishment and property seizure.
3. Protection From Prosecution
We hope 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 the joint return under penalty of perjury.
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. See Tax topic 205 and Publication 971 for more information on innocent spouse relief.
Consider the Downsides
Depending on a couple’s circumstances, the benefits listed above may be valuable, but there are some potential disadvantages with the MFS status.
The first is that if one itemizes, both must itemize, even if one has little in the way of itemized deduction. So for that spouse, taxable income may be significantly higher on their return.
Second, with MFS status, all education credits and deductions are disallowed, including student loan interest, which could be as much as $2,500 on a MFJ return. In addition, you cannot exclude from income the interest on U.S. savings bonds cashed in to pay education expenses. Similarly, you would not qualify for the earned income tax credit, the child and dependent care credit, or the credit for adoption expenses.
Third, the upper end of the phase-out range for IRA contributions is $10,000 for MFS (way below the $61,000 threshold for Single or $98,000 for MFJ). Other phase-out ranges are lower for MFS than for Single filing status. Some credits are halved including the child tax credit and the retirement savings contribution credit. Also, the income exclusion for employer provided dependent care assistance is reduced by half to $2,500, and your capital loss deduction is halved to $1,500.
Benefits of Filing Jointly
1. Getting Credit for Your Family
While filing separately makes sense in some situations, filing jointly makes you eligible for family-related tax credits and deductions. By filing jointly, you have access 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
- Child and Dependent Care Credit
- Adoption Credit
Furthermore, your deductions for personal exemptions, itemized deductions, the Child Tax Credit, and capital losses are not restricted by your filing status. Being able to itemize deductions can reduce your tax liability significantly. That, together with child-related credits, frequently makes 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 deductions is more complicated but often results in less taxable income. 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.
Determining When the “Marriage Penalty” Applies
There is a phenomenon known as the “marriage penalty.” This is based on the fact that, compared to two single people, a married couple seems at a disadvantage. The marriage penalty concept results from a comparison of a couple filing MFJ versus two individuals, each filing as Single.
For example, the limit on the deduction for student loan interest is $2,500 per return. If two single people file, they can each claim up to $2,500, for a combined deduction of $5,000. If they marry, they will be limited on their joint return to $2,500.
Beginning at the 25% tax bracket, the tax brackets for MFJ are less than twice the single bracket. The result is that MFJ returns reach higher tax brackets sooner than two people filing as Single. Also, various phase-out ranges for MFJ are less than twice that of single filers. These affect primarily individuals with higher incomes.
For example, there is an additional Medicare tax on single individuals whose earned income is over $200,000. For MFJ, the threshold is $250,000. So if two single people each have $150,000 in income, they would not have to pay the additional Medicare tax. But if they had the same income and were married and filing jointly, their combined incomes would be $300,000, which is over the MFJ threshold of $250,000, so they would have to pay the additional Medicare tax.
Weighing the benefits of each filing status can help you avoid the dreaded “marriage tax.”
If you’re still 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.
In Publication 501, the IRS states: “You will generally pay more combined tax on separate returns than you would on a joint return . . . unless you are required to file separately, you should figure your tax both ways . . . This way you can make sure you are using the filing status that results in the lowest combined tax.”
While many divorcing couples file separately, if you’ve been living apart for the last six months or are legally separated, 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. Most software used by professional preparers has a function that can split a return that is MFJ into two returns of MFS status and compare the tax liability.
Amending from MFJ to MFS must be done before the due date of the return. Amending from MFS to MFJ can be done up to three years after the due date of the original return, not including extensions.
For help with other issues, check out our complete Tax Guide.
Have you ever filed as married filing separately? How did it work?