Married couples don’t have to file taxes together. Filing separately is smarter and more efficient in certain cases.
Married filing separately is a tax status for married couples who choose to record their respective incomes, exemptions, and deductions on separate tax returns.
Understanding Married Filing Separately
The Internal Revenue System (IRS) provides taxpayers with 5 tax filing options every time they submit their annual tax returns. They can be classified as:
- Married Filing Jointly
- Married Filing Separately
- Head of Household
- Qualifying Widow
The IRS considers taxpayers married if:
- They are legally married under state law
- They live together in a state-recognized law marriage
- They are separated but have no divorce decree
For most couples, it makes more sense to file their tax returns together.
However, if one of them experiences a massive amount of medical bills, for example, then filing jointly lessens their ability to claim deductions.
Filing separately while you are married can be better for your unique financial circumstances.
Advantages of Married Filing Separately
There is a potential tax advantage when filing taxes separately. Here are some situations where it’s best for a couple to file separately:
Preparing for Unforeseen Expenses
Beneficial for situations when there is a big medical expense or there are miscellaneous itemized deductions.
When one spouse can lower their taxable income, married filing separately can trim a couple’s overall tax burden in case of a big unfortunate expense in the future.
Filing taxes separately is practical if one spouse has government loans or is accused of tax evasion or other fraud. This makes the other spouse avoid potential tax liability if the accused is proven guilty. This status can also be elected by just one spouse if the other refuses to file a tax return.
This is ideal for couples where one spouse has a much higher income while the other spouse has a lot of potential itemized deductions.
For instance, one spouse is a lawyer earning $300,000 per year while the other one is a surgical intern earning $50,000 per year.
The intern had an accident and needed to be admitted to the hospital for a week. They paid $13,000 for the hospital bill.
Keep in mind, the IRS rule for deducting unreimbursed medical expenses always has 7.5% of the filer’s adjusted gross income. This will lead to 2 outcomes.
- If the couple filed jointly, then only expenses more than $26,250 ($350,000 x 7.5%) will be deductible. This means none of the nurse’s medical expenses will be deductible since they total less than $26,250.
- If the couple filed separately, then the cost will easily exceed the call center agent’s threshold for medical deductions at $3,750 ($50,000 x 7.5%). This option makes the intern eligible for deductions because the hospital bill exceeds the total amount of $3,750.
Divorce or Separation
This was the primary reason why married filing separately status was made. In most cases, divorced couples are not willing to file their taxes together.
The federal government wants divorced couples to still stay compliant with their tax filing without their personal feelings getting in the way.
Disadvantages of Married Filing Separately
Couples filing their taxes separately will be severely limited in terms of tax and deductions.
In some cases, they won’t have the same deductions compared to couples filing jointly. Here are some of its disadvantages.
Forfeiture of major tax credits
Tax credits are items directly deducted from the liability. They are classified as:
- Nonrefundable Tax Credits
- Refundable Tax Credits
- Partially Refundable Tax Credits
Couples filing separately won’t be able to get a number of major tax credits under married filing separately.
Another drawback of filing separately is having less eligibility for tax deductions. Here are some examples.
- Couples filing separately have a higher tax rate than couples filing jointly.
- Their Alternative Minimum Tax will be twice higher compared to couples filing jointly.
- They won’t be able to claim their Child and Dependent Care Expenses Credit.
- They can’t claim the Earned Income Tax Credit.
- They can’t exclude employer-provided adoption benefits from your income.
- All deductions of every credit-related to education won’t be accessible. This includes American Opportunity, Lifetime Learning Credits, student loan interest deductions, tuition fees deduction.
- They can’t claim the tax Credit for the Elderly or the Disabled.
- Their Child Tax Credit, Saver’s Credit, and Capital Loss deduction will be cut to half.
- Couples living together won’t be able to deduct a loss from passive rental real estate activity. But if they’re not living together, they can claim these deductions, but it won’t be as big as with couples filing jointly.
Work Smart on Filing Your Taxes with Manay CPA
Most couples choose to file their taxes together because they want to maximize their deductions. Other couples file separately to prepare for unforeseen events– which is often overlooked.
One becomes better than the other depending on a couple’s situation and preferences. If you want to be aware of the ins and outs of tax filing, contact Manay CPA and see the bigger picture with us!