Married Filing Separately: Marriage Tax Benefit or Penalty?
If you’re married, deciding how to file your taxes—jointly or separately—may make a difference in how much you pay. Here’s what you need to consider.
Filing separately may be beneficial if you need to separate your tax liability from your spouse’s, or if one spouse has a significant itemized deduction.
Filing separately can disqualify or limit your use of potentially valuable tax breaks, but you should consider both ways to see which way will save you more in taxes.
Marriage comes with many difficult choices you and your spouse will have to make together. With whose family will you spend Thanksgiving? What neighborhood will you move to? Most of these are fun and exciting decisions. One less exciting but very important decision you’ll have to make is how to prepare your taxes.
In this article we’ll discuss the options married couples have when filing their taxes, the various advantages and disadvantages, and how the recent tax reform has impacted this decision.
What Are Your Options?
For all married couples, there is an annual choice to make when selecting your filing status: are you married filing jointly or married filing separately?
“Married filing jointly” is a filing status for married couples who choose to file one tax return together, while “Married filing separately” is a filing status for married couples who choose to file their file their tax returns separately.
The IRS encourages married couples, via tax deductions and higher income thresholds, to file jointly. The Tax Cuts and Jobs Act of 2017 created sweeping changes that increased some of these incentives. While more limited, there are still a few scenarios where filing separately may make sense. As with all tax related questions, the right choice for you will depend on your personal situation in any given year. Below are some scenarios where filing separately may make more sense.
When Should I Consider Filing Separately?
1. You have significant itemized deductions limited by adjusted gross income.
When you file your taxes, you have the option to take the standard deduction or to itemize your deductions, which means you’ll list and add up each and every deductible expense. Most people take the standard deduction when itemizing does not lead to a larger total deduction on your taxes.
If you and/or your spouse both have taxable income and at least one of you (ideally the person with the lower income) has significant itemized deductions that are limited by adjusted gross income (AGI), you should run the numbers to calculate the potential advantages of filing separately. For those who are married but filing separately, if one spouse itemizes deductions, the other must do so as well. The standard deduction is $24,400 for married couples filing jointly for the 2019 tax year.
Common itemized deductions limited by AGI are:
- Medical expenses, deductible only to the extent they exceed 10% of AGI for tax year 2019.
- Charitable contributions, deductible up to 20%, 30%, or 60% of AGI, depending on the type of gift.
As each spouse’s AGI—and AGI limits—are lower when filing separate returns, allowable deductions for these types of expenses may be considerably higher if you file separately. When one spouse can lower taxable income this way, married filing separately might reduce a couple’s overall tax liability.
A quick example: say one spouse has AGI of $60,000 and incurs $40,000 in medical expenses in 2020, while the other spouse has an AGI of $200,000 with no medical expenses. The spouse with the medical expenses could deduct costs that exceed $6,000 if they file separately, whereas if they filed a joint return only the medical expenses above $26,000 would be deductible. As you can see by filing separately in this case, the couple would be able to deduct an additional $20,000 by choosing to file separately.
2. You participate in income driven repayment plans for student loans.
If you and/or your spouse is part of an income based repayment plan for outstanding student loans, filing separately may mean lower monthly loan payments. Be careful with this one though: while it may be beneficial right now to have lower payments, keep in mind that these lower payments could mean higher tax implications in the future if the debt is forgiven. Debt forgiveness is generally taxable under current tax law.
3. To separate your tax liability from your spouse’s.
It may be preferable to file separately when you need to separate your tax liability from your spouse’s. Signing a joint tax return makes you both responsible for the accuracy and completeness of the entire return and obligates you for any current or future tax liability. If you file separately, you will only be responsible for the accuracy and payment of taxes for your own return. If you know or suspect that your spouse is omitting income or overstating deductions and/or credits, you may want to file separately.
4. You live in a community property state.
State income taxes can also impact your decision. In some states, considering the total federal and state tax liability may change the numbers in favor of filing separately. When one or both spouses live in a community property state, special rules apply for allocating income and deductions between each spouse’s tax return. Each spouse generally reports half of the total income and half of the deductions on each tax return.
Community property states are: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin.
5. You have distinct non-financial circumstances with your spouse.
If spouses live apart or are separated but not yet divorced and they wish to keep their finances as separate as possible, filing separately may be appropriate. In addition, if spouses do not live together and one spouse would qualify for head of household it may be more beneficial to file separate returns.
What Do You Lose By Filing Separately?
Ultimately, filing a joint return is typically more beneficial, particularly in light of the recent changes to the tax code. When you choose not to file jointly, you limit or altogether forgo several tax breaks and deductions including:
- The child and dependent care tax credit
- The adoption credit
- The Earned Income Credit
- Tax-free exclusion of U.S. bond interest
- Tax-free exclusion of Social Security benefits
- The credit for the elderly and disabled
- The deduction for college tuition expenses
- The student loan interest deduction
- The American Opportunity Credit and Lifetime Learning Credit for higher education expenses
- The deduction of net capital losses
- Traditional IRA deductions
- Roth IRA contributions
Everyone’s tax situation is different and can be complex. In most cases, the financial benefits of filing a joint tax return will outweigh filing separately, but it is important to know and understand your options. As with all tax matters, you will want to look at the numbers each year to find out which filing status will give you the greatest benefit. As always, if you have questions about your specific circumstances, seek the advice of a trusted tax professional.
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