First comes love, then comes marriage, then comes—filing with the Internal Revenue Service (IRS). Every couple should file jointly to get the tax benefits of being married, right? Wrong—many couples don't realize that filing separately might be the better move, in terms of tax strategies. In some instances, love doesn't have a place in your tax return.
Key Takeaways
- Though most married couples file joint tax returns, filing separately may be better in certain situations.
- Couples can benefit from filing separately if there's a big disparity in their respective incomes, and the lower-paid spouse is eligible for substantial itemizable deductions.
- Reasons to file separately can also include separation and pending divorce, and to shield one spouse from tax liability issues for questionable transactions.
- Filing separately does carry disadvantages, mainly relating to the loss of tax credits and limits on deductions.
The Disadvantages of Filing Separately
There are several reasons why the married-filing-separately status is seldom chosen by couples. The biggest reason is the forfeiture of many major tax credits and deductions that are available to those who file jointly, such as:
- Child tax credit (half the married filing joint rate is available)
- Child and dependent care credit (a partial credit may be possible if the spouses are living separately)
- Adoption credit
- All deductions and credits of every kind relating to education, such as the American opportunity and lifetime learning credits, student loan interest deduction, and tuition and fees deduction
- Traditional IRA deduction phaseout between a lower adjusted gross income (AGI) range of $0 to $10,000 (if living together and the spouse has a qualified plan offered through an employer; if living separately the IRA deduction is determined the same as "single" filer status)
Reporting Deductions
There is another limitation when it comes to married filing separately: Both spouses must choose the same method of recording deductions, even if one of them would be better off doing so under the opposite method.
For example, if one spouse decides to itemize deductions, the other spouse must do so as well, even if their itemized deductions are less than the standard deduction. If one spouse has itemized deductions of $20,000 and the other has only $2,500, the second spouse must claim that $2,500 rather than the larger standard deduction.
This means that filing separately is a good idea from a tax-savings standpoint only when one spouse's deductions are large enough to make up for the second spouse's lost deduction amount.
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Reasons for Couples to File Separately
There are several situations in which a couple should file separately. These include divorce or separation, issues with liability, the repayment of student loans, or different pay scales. We examine each a little more in detail below.
Divorce or Separation
Legal separations were why the married filing separately status was created. For a variety of reasons, divorcing or separated couples may not be willing to file their taxes jointly. There are a few considerations for people who find themselves in this situation. For instance, only one individual can claim a dependent child.
Liability Issues
Filing separately also may be appropriate if one spouse suspects the other of tax evasion. In that case, the innocent spouse should file separately to avoid potential tax liability due to the behavior of the other spouse. This status can also be elected by one spouse if the other refuses to file a tax return at all.
Student Loan Repayment
A couple may want to file separately rather than jointly if one or both of them are making student loan repayments. Separate filers can get a lower monthly payment on an income-driven repayment plan by excluding their spouse's income and this can be achieved by filing a separate return.
Diverse Pay or Deduction Scales
Protecting yourself from a negative outcome isn't the only reason to file separately. Even the most happily married couple may come out ahead by choosing this route. The primary instance is with childless couples, in which one spouse has a considerably higher income and the other spouse has substantial potential itemized deductions.
Consider a situation in which one spouse is a doctor earning $200,000 a year, while the other is a teacher earning $45,000. The teaching spouse had surgery during the year and paid $12,000 in unreimbursed medical expenses. The IRS rule for deducting unreimbursed medical expenses dictates that only expenses totaling more than 7.5% of the filer's AGI (formerly 10% for most taxpayers) can count as a miscellaneous itemized deduction.
- If the couple files jointly, only expenses totaling more than $18,375 ($245,000 x 7.5%) are deductible. Therefore, none of the teacher's medical expenses could be deducted because they total less than $18,375.
- If the couple filed separately, the cost would easily exceed the teacher's threshold for medical deductions, which would be $3,375 ($45,000 x 7.5%), based only on the teacher's AGI. This would leave an eligible deduction of $8,625 for the teaching spouse to claim on Schedule A of Form 1040 (the tax return).
Even if, in a normal year, it would make more sense for this couple to file jointly, in the year of the big medical expense, filing separately might make more sense.
The source of funds is highly important in this type of situation. According to the IRS, "If you and your spouse live in a noncommunity property state and file separate returns, each of you can include only the medical expenses each paid. Any medical expenses paid out of a joint checking account in which you and your spouse have the same interest are considered to have been paid equally by each of you unless you can show otherwise."
Can I Claim the Earned Income Tax Credit If I'm Married and Filing Separately?
You can claim the EITC under some narrow circ*mstances if you're married and file a separate return. You must have lived apart from your spouse for at least six months of the year. You can also qualify if you have a written separation agreement and didn't live with your spouse at the end of the tax year. But you must have a qualifying child who lived with you for more than half the year.
Who Gets to Claim Our Child As a Dependent If We File Separate Tax Returns?
Only one of you can claim your child as a dependent and the Internal Revenue Code (IRC) has tiebreaker rules that determine which of you can do so if you file separate tax returns and you can't agree on which of you will claim them. The parent with whom the child lived most during the year has the first right. The parent with the highest adjusted gross income can claim them if the child lived with both parents the same percentage of the year.
Can My Spouse and I Split Our Itemized Deductions If We File Separate Tax Returns?
You can split your deductions if payment for the expenses was made from money owned by both of you. This typically means that the expense was paid from a joint bank account. But the asset that's receiving the payment, such as your home's mortgage, must generally be owned jointly as well.
How Can I File my Tax Return?
There are several ways you can file your tax return:
- You can complete a paper return and mail it to the IRS. Ensure that your envelope is postmarked by the due date for it to be considered on time. Include your payment if you have a balance owing.
- Prepare your return using tax preparation software. You can complete a simple return for free with most programs while more complicated ones may incur a fee.
- Hire a professional, such as a tax preparer or accountant.
- Eligible taxpayers in 12 states can file directly with the IRS using Direct File for free. Refer to the IRS website to see if you qualify.
The Bottom Line
There are many factors involved in determining whether married couples should file separately or jointly. When a couple is unsure of which filing status to choose, it makes sense to compute the tax return both ways to determine which will give the biggest refund or lowest tax bill.
Couples with no dependents or education expenses generally benefit from filing separately if there's a big disparity in their respective incomes, and the lower-paid spouse is eligible for substantial itemizable deductions. Other instances when filing separately is appropriate are related to divorce, separation, or relief from liability for tax fraud or evasion.
If you are unsurewhether the married-filing-separately strategy is appropriate for you, consult your tax advisor. You never know whether there are any tax deductions you may be missing.
