Are you married? That seems like an easy question, but the answer can get complicated when it involves the filing status on your federal income tax return. For tax purposes, your marital status is determined as of the last day of the year. If you’re legally married on December 31, as far as the IRS is concerned, you were married for the entire year.
If you’re married according to IRS rules, you have a decision to make: Should you and your spouse file jointly or separately?
Choosing a filing status doesn’t reflect on the state of your marriage or how committed you and your spouse are to each other. It’s about making the best decision for your financial situation. Each filing status has its own set of benefits and potential pitfalls. Here’s everything you need to know to choose whether to file jointly or separately. For help with other tax issues, check out our complete tax guide.
Married Filing Separately
Filing separately from your spouse has a number of potential benefits.
1. More Opportunity for Deductions
If you and your spouse have a lot of tax deductions, filing separately may help you lower your tax bill. Some tax breaks hinge on whether your total deductions exceed a certain percentage of your adjusted gross income (AGI). By separating your income, you might have a better chance of meeting that threshold.
For example, to benefit from the medical expenses deduction in the 2020 tax year, your total unreimbursed medical expenses must exceed 7.5% of your AGI. If one spouse has large out-of-pocket medical expenses and the other spouse has a lot of income, filing jointly may prevent you from taking advantage of the deduction for medical expenses.
2. Refund Protection
If your spouse has financial troubles, such as tax debts, unpaid child support or alimony, or defaulted federal student loans, filing jointly may put your refund at risk. The IRS may hold some or all of your tax refund to pay that debt, regardless of which spouse’s deductions, credits, or withholding led to the refund.
When you file separately, 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.
3. Avoid Collections
When you file jointly, both spouses are liable for the tax due. Let’s say your spouse has a lot of income but doesn’t have enough tax withheld from their paycheck and doesn’t make estimated tax payments. If you file jointly and owe a large tax bill you can’t afford to pay, the IRS can pursue collection by garnishing your salary or levying your bank accounts. Filing separately protects your salary and assets from being seized to cover your spouse’s tax debt.
4. Legal Protection
Hopefully, your spouse is trustworthy, but if they falsify a tax return, filing separately protects you from audits and prosecution. If you file jointly and your spouse intentionally omits income, pads deductions, or claims tax credits for which you aren’t eligible, you can be held equally liable because you signed the joint return under penalty of perjury.
Although the IRS offers “innocent spouse” protection in cases of fraud, you’ll face the challenge of proving that you didn’t know about the fraudulent activity. See Tax Topic 205 or IRS Publication 971 for more information on innocent spouse relief.
Pro tip: By using tax preparation software from a company like H&R Block, you’ll have confidence you’re getting every available tax deduction and minimizing your tax liability.
Consider the Downsides
Depending on your circumstances, the benefits listed above may be valuable, but there are several potential disadvantages to choosing the married filing separately (MFS) status.
The first is that if one spouse itemizes, both must itemize. If one spouse has little in the way of itemized deductions, their taxable income may be significantly higher on their return than it would be if they’d claimed the standard deduction.
Next, with the MFS status, several tax breaks are disallowed. These include deductions and credits for education, such as the student loan interest deduction, the Lifetime Learning Credit, and the American Opportunity Tax Credit. In addition, you cannot exclude from income the interest on U.S. savings bonds cashed in to pay education expenses. Similarly, you cannot claim the Earned Income Tax Credit, the Child and Dependent Care Credit, or the credit for adoption expenses. Some credits are halved, including the Child Tax Credit.
You may not be able to make deductible contributions to a traditional IRA if you use the MFS status. For 2020, married couples who are covered by a retirement plan at work can deduct the full amount of their IRA contribution, up to the annual limit, if their modified AGI is $104,000 or less and they file jointly. If their modified AGI is more than $104,000 but less than $124,000, they receive a partial deduction, and the deduction is phased out for incomes above $124,000.
For married couples who file separately, that threshold is much lower. In order to make deductible contributions to an IRA, an MFS filer needs to have a modified AGI of $10,000 or less. Over that threshold, there is no deduction.
Finally, the income exclusion for employer-provided dependent care assistance is reduced by half to $2,500 if you file separately, and your capital loss deduction is cut in half, from $3,000 to $1,500.
Married Filing Jointly
Filing separately makes sense in some situations, but filing jointly is almost always simpler and often results in a bigger tax break. Here are some reasons why that happens.
1. More Tax Credits
By choosing the married filing jointly (MFJ) status, you’re eligible to claim more tax credits, including:
- The American Opportunity Tax Credit and other tax breaks for education
- The Earned Income Tax Credit
- The Child and Dependent Care Credit
- The adoption credit
Other tax perks, such as the Child Tax Credit and deductible contributions to retirement accounts, aren’t restricted by this filing status. That frequently makes MFJ the more advantageous choice from a tax liability perspective.
2. Retirement Contributions
If you want to make tax-deductible contributions to an IRA, you’ll find more generous requirements when you file jointly as opposed to separately. As mentioned above, the IRS determines your maximum deductible contribution based on AGI, and the threshold at which you lose your deduction is much lower for MFS filers than it is for MFJ filers. After crunching those numbers, joint filing almost always looks better.
3. Itemizing Your Returns
Itemizing your deductions is more complicated than claiming the standard deduction, but if you have significant itemized deductions, it can lower your tax bill significantly. If you choose to file separately and one spouse itemizes, both must itemize. That means that one of you can’t take the standard deduction while the other itemizes. If only one of you has a lot of deductions, one spouse could owe a lot more tax when claiming itemized deductions, which could mean a bigger tax bill overall.
Remember, the standard deduction is $12,400 for MFS filers and $24,800 for MFJ filers. You may find that joint filing and the $24,800 standard deduction result in a lower tax bill.
Determining When the “Marriage Penalty” Applies
You may have heard of the “marriage penalty” and worried that you’ll owe more taxes now that you’ve tied the knot. The marriage penalty occurs when two individuals pay more taxes as a married couple than they would pay as single individuals.
Over the years, different aspects of the tax code have contained a marriage penalty. For example, before the TCJA, there was a marriage penalty for taxpayers in the mid to upper tax brackets because the brackets for married couples at those levels were not double the equivalent brackets for single individuals. Starting in 2018, tax brackets for MFJ filers are double those for single filers, except at the top 37% bracket.
However, the marriage penalty still exists in other aspects of the tax code. 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 to a $2,500 deduction on their joint return.
The deduction for state and local taxes is another area with marriage penalty implications. Starting with 2018 returns, taxpayers can deduct up to $10,000 of state and local taxes paid. That limit applies to the combined total of property taxes and either income or sales taxes. The cap is the same for married couples and single filers. So two single people can each claim up to $10,000 for a combined deduction of $20,000. When they marry, they are limited to a $10,000 deduction on their joint return.
Weighing the benefits of each filing status can help you avoid the dreaded marriage penalty.
If you’re still not sure which filing status is best for you, tax preparation software from H&R Block can help. Many programs include an option to compare MFS with MFJ filing to see how much you might save by filing jointly. Even if your software doesn’t have that option, you can calculate your taxes under each filing status to see which gives you a lower tax bill. Keep in mind that unless you fall under one of the special situations listed above, most couples save money by filing jointly.
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 single, which can make more credits and deductions available to you than MFS.
Major life events often change the filing status that’s best suited to you. If you believe it’s time to make a change and file separate returns, you might want to have a CPA or tax professional compare your return or at least review the forms you completed. It can help ensure that you’re taking advantage of every available tax break.
If you choose the wrong filing status, you can amend a return from MFJ to MFS as long as you file the amendment before the original due date of the return. You can amend from MFS to MFJ up to three years after the original due date of the return, not including extensions.