Marriage comes with shared joys, but also joint responsibilities…like tax returns. Whether or not you’ve combined finances completely, you have two options for filing tax returns: married filing separately or married filing jointly.
Filing taxes typically requires several worksheets and calculations that may seem tedious enough to tackle for a couple, let alone doing it twice. However, we do occasionally get a question about whether spouses should file separately. Maybe they read something online, maybe they heard about someone doing it to get “extra” tax deductions, or perhaps the couple is thinking about separating.
Generally, the decision to file separately depends on a couple’s complete picture, and just because spouses can file alone doesn’t mean that they should. Here’s how we think about it.
Filing separately vs. filing jointly: a quick overview
Spouses who are married filing jointly (MFJ) file one tax return. They both include their identifying information and incomes and claim deductions together. As a result, both spouses are responsible for the information in the return (plus the tax bill).
By contrast, individuals who are married filing separately (MFS) file separate tax returns. Their incomes and deductions are calculated separately, and each spouse is only responsible for their own taxes, errors, and omissions.
When should you file separately?
We will be direct here: for most couples, the married filing separately status provides limited benefits (and can even generate a larger tax bill).
Filing separately only makes sense in a handful of situations, and they’re usually quite specific. Let’s look at a few.
A sizable income disparity plus itemized deductions
If one spouse earns substantially more and the other spouse has significant itemized deductions, filing separately can save more on taxes. For example, a couple may not qualify for the medical expense deduction jointly, but one spouse may qualify when filing separately. Keep in mind that if one spouse itemizes deductions, the other must do the same — even when filing separately.
Qualifying for income-based student loan payments
Some income-driven student loan repayment plans calculate payments based on one spouse’s income. In order to qualify, you generally have to file separate returns. Opting for MFS could make sense if you would otherwise be disqualified from a desired repayment schedule.
You’re worried about joint liability
Spouses who are MFJ are legally “jointly and severally liable” for the accuracy of their tax return and for the resulting tax bill. In other words, the IRS holds both spouses responsible for inaccuracies, taxes, or penalties.
In some cases, you may want to avoid such liability for legal or financial reasons. Generally, this crops up when one spouse owes child support or back taxes. You may also file separate returns if you’re separating or in the middle of a divorce.
Separate returns lead to bigger refunds (or small tax bills)
Occasionally, filing separately could potentially produce smaller tax bills or a larger refund. But don’t bank on this outcome. You will need to run the numbers, and you might be knocking yourself out of the running for certain tax credits if you follow this route.
When filing jointly makes sense
Occasionally, married filing separately is the better bet. But assuming no one has a skeleton in their closet, filing jointly often leads to bigger financial benefits. Here are 6 reasons why filing jointly makes sense.
1. Many tax credits and deductions go away when you file separately
Filing separately may actually disqualify you from certain credits and deductions. In some cases, those credits and deductions don’t disappear entirely, but you may see less money (or get phased out of qualifying at a lower income). This may apply to:
- The Earned Income Credit
- The Child and Dependent Care Credit
- Education-related credits
- Student loan interest deductions
- The Social Security benefits exclusion
Even in the proposed First-Time Homebuyer Tax Credit (a bill not yet signed into law), the deduction gets halved for a spouse filing separately.
2. Your tax bracket can go down when filing jointly
When filing separately, you could potentially move into a higher tax bracket at a lower income threshold, which means a higher tax rate. The reverse can be true when you combine incomes.
3. The Recovery Rebate Credit and Advanced Child Tax Credit
Two new credits have appeared on the scene in the last two years: the Recovery Rebate Credit and Advance Child Tax Credit. The first lets you claim your Economic Impact Payments if you didn’t receive them in 2020. The second sent out advance payments of up to 50% of the 2021 Child Tax Credit.
Because these credits are new and somewhat unusual, they introduce additional considerations into tax planning. For example, you might not qualify for them at a lower income threshold when filing separately.
4. State law can complicate your taxes when filing separately
State law also changes how you file separately. If you live in a community property state, earnings your state considers community income belongs to both spouses equally.
That means that if you earn $20,000 and your spouse earns $80,000, then when you file separately each spouse will report $50,000 in income (50% of the combined $100,000). However, there are also exceptions that make your situation a bit messier.
Community property states include:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
5. You can maximize Roth retirement contributions when filing jointly
Roth IRAs are tax advantaged retirement plans you may hope to contribute to. If you file separately, but you lived with your spouse at any point during the year, you can only contribute to a Roth IRA if your income is less than $10,000. Conversely, married couples filing jointly can contribute to a Roth IRA regardless of the income split, as long as their AGI is under $204,000 (for 2022).
6. Filing costs can be lower when filing jointly
If you pay a professional, such as a CPA, to do your taxes, you’ll pay more if both spouses file their own tax return. While the cost may not make or break you, it’s usually wiser to get the most bang for your buck.
Don’t make your decision alone
For most couples, married filing separately is the wrong choice. However, situations vary, and it is possible that one of our readers is that rare exception. Instead of making that decision alone, bring it to the pros. Here at TreMonte, we can help you run the numbers, evaluate the pros and cons, and decide together which tax status benefits you the most. Schedule a call with a member of our team today!
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