As I was discussing what I do for a living with friends this past weekend (which usually just puts them to sleep or makes them not want to be friends with me…) I received a question from a good friend that I didn’t know how to answer right away, since this particular circumstance occurs so infrequently. My friend had asked: “Why would anyone file married filing separately? Is there any benefit?”
Being a tax professional, I had knowledge of some limited situations where married filing separately actually helps two taxpayers rather than hinders them – but I needed more research. The elusive married filing separately filing status is something that every tax professional knows is rarely-used. Generally, we can run a comparison in a professional tax preparation software suite that shows us filing separately versus filing jointly, but it usually tells us to stick with the latter. (If you would like Boundless to run this comparison for you – ask us!)
So my good friend’s question still stood – why would any married couple using the tax filing status of married filing separately? I did some research in some professional tax publications (see comment about falling asleep above) and found out some facts to share! Oh great!
Keep in mind – all the topics below highlight why it may be advantageous to set your filing status as married filing separately. Each tax situation is different, and we recommend consulting your tax professional (like Boundless Tax!) to see if these situations may work in your favor. There are many other disadvantages as well, which we will get into towards the end.
Married filing separately: One Spouse has Significant Itemized Deductions
When you itemize your deductions, you add up every deductible expense, whether it be charitable contributions or medical expenses. Most people (especially after the Tax Cuts & Jobs Act) simply use the standard deduction, but you have a lot of tax-deductible expenses, it may still be advantageous for you to itemize your tax deductions.
Compounding this decision is when these deductions are more one-sided to only one spouse in a married couple. If you and your spouse both have taxable income, and one of you has significant itemized deductions, some of those itemized deductions are limited to a percentage of your joint adjusted gross income (AGI).
In short – by reporting both you and your spouse’s income on one return, you could be effectively limiting your itemized deductions to a lower amount.
If you and your spouse filed separately, one of you may be able to claim a higher amount of itemized deductions, therefore increasing your net refund (or decreasing your tax owed) as a married couple.
Common itemized deductions that are limited to a percentage of your AGI are:
- Medical expenses – only deductible to the extent they exceed 10% of AGI for tax year 2019. (Example – if you have an AGI of $100,000, only the portion of expenses greater than $10,000 is deductible.)
- Charitable contributions – only deductible up to 20%, 30%, or 60% of your AGI for tax year 2019, depending upon the type of gift and the type of organization receiving your gift.
Since each spouse’s AGI will be lower when filing separate returns, allowable deductions for limited expenses may be considerably higher.
Consider the following example:
- Spouse #1 has an AGI of $80,000 and incurs medical expenses of $20,000
- Spouse #2 has an AGI of $140,000 and incurs no medical expenses
- If these spouses filed jointly, their AGI would be $220,000, 10% of which is $22,000. This leaves none of their medical expenses above 10% of their AGI, therefore making all medical expenses non-deductible.
- If these spouses filed separately, spouse #1’s AGI is $80,000, 10% of which is $8,000. This leaves $12,000 of his/her medical expenses above 10% of their AGI, therefore making $12,000 of medical expenses deductible.
As you can see in the above example, the married couple could deduct an additional $12,000 in itemized deductions if choosing to file separately.
One (or both) of you Participate in Income-Based Student Loan Repayment
If you and/or your spouse participate in an income-based student loan repayment plan, filing separately may lower your monthly student loan payments. Since the Federal government uses your tax returns to verify your income, and therefore to verify your monthly payment on your student loan is accurate compared to your annual income, if you can (legally) show a lower income on your tax return – your student loan payments may be lower!
One caveat, though: While it may be incredibly beneficial to have lower payments currently, keep in mind that these lower payments may have high tax implications in the future if your student loan debt is forgiven. Debt forgiveness is taxable under current law, but it is in rare circumstances that your student loan debt is forgiven, anyway. You usually must be employed as a teacher by an “impoverished” school district, or be a certain type of employee in a certain branch of government for at least ten years before forgiveness is even considered.
File Separately So Your Spouse Doesn’t Have to Pay Your Tax Liability
If only one of you performs an activity that gives rise to a situation where you may owe tax or have a large tax liability, it is more favorable to the other spouse if their husband/wife files separately from them.
A big common example of this include one spouse being self-employed or freelancing, while the other holds a position as an employee (receives a W-2). This situation is not necessarily fair to the spouse that has a simple W-2 return, since it’s likely that the other spouse who is self-employed is gobbling up some of the overpayment of tax that was withheld from the W-2 spouse’s paycheck.
For example, let’s assume spouse #1 earns $50,000 on their W-2, and their employer withholds $5,000 of Federal tax. Assume that spouse #1’s employer over-withheld from his/her paycheck, and they are due a $2,500 refund. Now spouse #2 is self-employed and earned $20,000 this past year – nobody is withholding tax for this spouse because they are self-employed. That $2,500 is going to offset the tax due for spouse #2 on $20,000 of otherwise untaxed income, and spouse #1 will never see their refund they’re rightfully due. If the spouses filed separately, spouse #1 would get his/her $2,500 refund, and spouse #2 would owe all of the tax they rightfully owe – without considering spouse #1’s $2,500 over-withholding.
Another example of this is if you suspect that your spouse isn’t necessarily filing an accurate and complete return. While this seems like this would spell problems in your marriage before you’d necessarily be concerned about your tax filings, if you filed separately from your spouse, you would only be responsible for the accuracy and completeness of your own return, not his/hers.
Married Filing Separately Can Help If you Live in a Community Property State
State taxes can weigh heavily on filing separately versus filing jointly in community property states. In these states, special rules apply for allocating income and deduction between each spouse’s return, and each spouse generally reports half the total income and half the total deductions on each of their returns.
If you live in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington or Wisconsin, you are in a community property state, and may want to consult with your tax advisor to see if the community property filing requirement makes favorable or unfavorable changes to your tax liability.
Non-Financial Circumstances (i.e. Impending Separation/Divorce)
If spouses are living apart under separation and/or an impending divorce, filing separately may be appropriate to keep finances as separate as possible.
In addition, if spouses are not living together and have children or other dependents, one spouse may qualify for the head of household filing status, which is more beneficial (in most cases) than married filing separately. This is another reason why it would be highly beneficial to file separate returns.
These are all Good Reasons – Now What About Reasons not to?
You’re right – we have only focused on reasons to file married filing separately, but not on the reasons not to. Common knowledge among taxpayers and tax professionals alike says that it is generally not advantageous to either spouse to have a married filing separately filing status – and that common knowledge is completely correct. Save for the unique circumstances presented thus far, it is usually not a great idea to file separately. Here is a laundry list of reasons why not:
- Neither spouse can claim the child & dependent tax care credit
- Neither spouse can claim the adoption credit
- Neither spouse can claim the Earned Income Credit (EIC)
- There is no tax-free exclusion for U.S. Bond Interest or Social Security Benefits for either spouse
- Neither spouse can claim the credit for elderly & disabled
- All higher education deductions go away for both spouses – including the American Opportunity Credit, Lifelong Learning Credit, Tuition & Fees Deduction, and the deduction for student loan interest payments
- No deductions are allowed for either spouse for net capital losses, or traditional or Roth IRA contributions
Married Filing Separately: The Conclusion.
In the end, every tax situation is different, and everyone’s life circumstances are different as well.