First came love, then came marriage, then came the decision to file joint tax returns with the Internal Revenue Service (IRS).
Every good couple is supposed to file together, right? Wrong! Many couples don't realize that filing separately may actually better their financial situations. In some instances, love doesn't have a place in your tax return. Find out why.
There are a number of reasons why the married-filing-separately status is seldom chosen by couples who file. The biggest reason is the forfeiture of a number of major tax credits and deductions that are available to those who file jointly, such as:
- Earned income credit
- Child tax credit
- Child and dependent care credit
- Elderly and disabled 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
- Adjusted gross income (AGI) phaseout threshold of $0-$10,000 for traditional IRA deductibility
Furthermore, when it comes to married filing separately, both spouses must choose the same method of recording deductions. If one spouse decides to itemize deductions, then the other spouse must do so as well, even if their itemized deductions are less than the standard deduction.
Example – Separate Filers Must Both Itemize For example, if one spouse has itemized deductions of $20,000 and the other spouse only has $2,500 worth of itemized deductions, then the second spouse must still itemize and can only claim $2,500 worth of itemized deductions instead of the larger standard deduction. This is only a good idea when the one spouse's deductions are large enough to make up for the second spouse's lost return.
Reasons to File Separately
There are a number of situations where it is the best idea for a couple to file separately.
Originally, the status was created to accommodate divorcing or separated couples who are not willing to file their taxes jointly. It also may be appropriate if one spouse suspects the other spouse of tax evasion because the innocent spouse should file separately to avoid potential tax liability for the other spouse. This status can also be elected by one spouse if the other refuses to file.
Diverse Pay/Deduction Scales
Protecting yourself from a negative outcome isn't the only reason to file separately. Today, 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 considerably higher income and the other spouse has substantial potential itemized deductions.
Example – Incomes and Deductions Determine When to File Separately Consider a case where one spouse is a doctor earning $200,000 a year, while the other spouse is a teacher earning $45,000 a year. The teaching spouse has surgery during the year and pays $10,000 in unreimbursed medical expenses. The IRS rule for deducting unreimbursed medical expenses dictates that only expenses in excess of 7.5% of the filer's AGI can count as a miscellaneous itemized deduction. If the couple files jointly, then only expenses in excess of $18,375 ($245,000 x 7.5%) will be deductible. Therefore, none of the expenses will count because the total expenses incurred are less than this. However, if the couple were to file separately, this amount would easily exceed the teacher's threshold for medical deductions, which in this case would be $3,375, based solely on the teacher's AGI. This would leave an eligible deduction of $6,625 for the teaching spouse to claim on Schedule A of the 1040.
The Bottom Line
There are many factors involved in determining whether it is better to file separately or jointly. When a couple is unsure of which filing status to choose, it may be necessary to compute the tax return both ways in order to determine which will give the biggest refund or lowest tax bill. In general, couples with no dependents or education expenses can benefit from filing separately if one has high income and the other has substantial deductions. Generally, other instances when this is appropriate are related to divorce, separation or relief from liability for tax fraud or evasion. If you are unsure whether this strategy is appropriate for you, consult your tax advisor.