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.
- 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 a number of reasons why the married-filing-separately status is seldom chosen by couples. 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 (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-$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)
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.
Reasons for Couples to File Separately
There are a number of situations, however, in which it is best for a couple to file separately:
Divorce or separation
Legal separations were the original rationale for the creation of the "filing separately" status. For a variety of reasons, divorcing or separated couples may not be willing to file their taxes jointly.
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.
Diverse pay or 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 a considerably higher income and the other spouse has substantial potential itemized deductions.
For example, 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 has 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 in excess of 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 in excess of $18,375 ($245,000 x 7.5%) will be deductible. Therefore, none of the teacher's medical expenses could be deducted because they total less than $18,375.
- But 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 actually 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."
The Bottom Line
There are many factors involved in determining whether it is better for married couples to 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.
In general, couples with no dependents or education expenses 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.
Generally, other instances when filing separately is appropriate are related to divorce, separation, or relief from liability for tax fraud or evasion.
If you are unsure whether 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.