What Married Taxpayers Lose By Filing Separately
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.
Married couples who file jointly must complete one shared tax return and jointly take responsibility for the income reported and taxes owed.
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.
For all married couples, there is an annual choice to make when selecting your filing status: married filing jointly (MFJ) or married filing separately (MFS)?
As with most tax-related questions, the answer depends on your personal situation.
It’s important to note that married filing separately is not the same as filing as a single person. In most cases, it doesn’t make sense to file separately because a married couple will usually end up paying more total tax with two returns.
But, there are exceptions to every rule—and this one is no different. There are cases when filing separately makes more sense in order to maximize a deduction or to separate tax liability. That means it is important to look at your individual situation each year when deciding how to file.
What You Lose By Filing Separately
Filing separately can disqualify or limit your use of potentially valuable tax breaks, including (but not limited to):
- 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
MFS taxpayers must both claim the standard deduction or must both itemize their deductions. In other words, one MFS taxpayer cannot claim the standard deduction if the other spouse is itemizing.
So, why would it make sense to file separately?
What You Gain By Filing Separately
There are some situations in which filing separately can actually result in tax savings. A few common scenarios include:
Separation of 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 return and obligates you for any current or future tax liability or penalties. If you file separately, you will only be responsible for the accuracy and payment of taxes for your own return.
So, if you know or suspects that your spouse is omitting income or overstating deductions and/or credits, you may want to file a separate return.
Lower Overall Tax Bill If One Spouse Has a Significant Itemized Deduction
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.
Common itemized deductions limited by AGI are:
- Medical expenses, deductible only to the extent they exceed 10% of AGI—7.5% if you’re age 65 or older
- Personal casualty losses, deductible only to the extent they exceed 10% of AGI
- Miscellaneous itemized expenses, such as unreimbursed employee business expenses, fees for tax advice and preparation, and investment expenses, deductible only to the extent they exceed 2% of AGI
- Charitable contributions, deductible up to 20%, 30%, or 50% of AGI, depending on the type of gift
For example, AGI determines if a couple can deduct unreimbursed healthcare costs and casualty losses on Schedule A. However, out-of-pocket medical expenses must exceed 10% of AGI to qualify as a deduction. Casualty losses must also total more than 10% of AGI. (See IRS guidelines on medical deductions.)
The spouse with the substantial medical expenses calculates deductibility against only his lower AGI when filing separate returns. As each spouse’s AGI—and AGI limits—are lower on 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.
State income taxes can also impact your decision. In some states, considering the total federal and state tax liability together 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.
Some additional situations when filing separately may be preferred for non-financial reasons include:
- One spouse is unwilling or unable to consent to filing a joint tax return.
- The spouses live apart or are separated but not yet divorced, and they wish to keep their finances as separate as possible.
- The spouses live apart and one spouse would qualify for head of household.
The bottom line is that it’s important to consider your individual situation, then do the math both ways—filing separately and jointly— to see which provides the overall lowest tax liability.
The content on this post is not intended to provide tax, legal, accounting, financial, or professional advice, and readers are advised to seek out qualified professionals that provide advice on these issues for specific client circumstances. In addition, the publisher/blogger cannot guarantee that the information on this website/post has not been outdated or otherwise rendered incorrect by subsequent new research, legislation, or other changes in law or binding guidance. The publisher/blogger shall not have any liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website/post.
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Lisa Hay is an employee of Cornerstone Capital Advisors, a SEC Registered Investment Advisor. Any views or opinions expressed here are that of her own and not necessarily those of Cornerstone, its owners, or employees.
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