Love comes first, then marriage, and finally—filing with the Internal Revenue Service (IRS).To take advantage of the tax advantages of marriage, every couple should file jointly, right? Wrong—many couples fail to see that filing separately may be the best tax strategy. In certain cases, love is not deductible on your tax return.
- Although most married couples file joint returns, filing separately may be preferable under some circumstances.
- Couples may profit from filing separately if their earnings are significantly different and the lower-paid spouse is entitled for significant itemizable deductions.
- Separation and imminent divorce are additional reasons to file separately, as can shielding one spouse from tax responsibility difficulties for dubious activities.
- Filing separately does carry disadvantages, mainly relating to the loss of tax credits and limits on deductions.
The Disadvantages of Filing Separately
Couples seldom choose the married-filing-separately status for a variety of reasons. The most significant cause is the loss of a number of significant tax benefits and deductions provided to joint filers, such as:
Another drawback of married filing separately is that both spouses must use the same method of recording deductions, even if one would be better off using the opposite approach.
For example, if one spouse chooses to itemize deductions, the other must as well, even though their itemized deductions are less than the standard deduction. If one spouse has $20,000 in itemized deductions and the other has just $2,500, the second spouse must claim the $2,500 instead of the bigger standard deduction. This indicates that filing separately is a smart option only when one spouse’s deductions are substantial enough to compensate for the second spouse’s lost deduction amount.
Reasons for Couples to File Separately
However, there are several circumstances in which a couple should file separately:
Divorce or separation
The initial purpose for the “filed separately” status was legal separations. Divorcing or separated spouses may be unwilling to file their taxes jointly for a number of reasons.
Separate filing may also be warranted if one spouse accuses the other of tax avoidance. In such instance, the innocent spouse should file separately to avoid any tax liabilities as a result of the other spouse’s actions. If one spouse refuses to submit a tax return, the other spouse might choose this status.
Diverse pay or deduction scales
The sole reason to file separately is to protect oneself from an unfavorable result. Even the most happily married couple today may benefit from taking this road.
The most common example is with childless couples in which one spouse has a much larger income and the other spouse has significant potential itemized deductions.
Consider the following scenario: one spouse is a doctor making $200,000 per year, while the other is a teacher earning $45,000. During the year, the teaching spouse underwent surgery and spent $12,000 on unreimbursed medical expenditures. Only costs in excess of 7.5% of the filer’s AGI (previously 10% for most taxpayers) may be deducted as a miscellaneous itemized deduction, according to the IRS regulation.
- 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) (the tax return).
Even though it would make more sense for this couple to file jointly in a regular year, filing separately may make more sense in the year of the large medical bill.
In this sort of circumstance, the source of funding is critical. According to the Internal Revenue Service, “If you and your spouse reside in a noncommunity property state and file separate returns, you may only include the medical expenditures that you actually paid. Unless you can establish otherwise, any medical expenditures paid out of a joint checking account in which you and your spouse have equal interest are presumed to have been paid equally by both of you.”
The Bottom Line
There are several elements to consider when deciding whether married couples should file jointly or individually. When a couple is unclear about which file status to choose, it is a good idea to calculate the tax return both ways to see which would result in the largest refund or lowest tax cost.
In general, if there is a significant discrepancy in their respective earnings and the lower-paid spouse is entitled for considerable itemizable deductions, couples with no dependents or school expenditures may profit from filing separately.
Other situations in which filing separately is appropriate include divorce, separation, or relief from responsibility for tax fraud or evasion.
Consult your tax expert if you are unclear if the married-filing-separately method is right for you. You never know what tax breaks you could be missing out on.
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