Individual Tax

Marriage & Taxes: Married Filing Jointly vs. Separately

Hood & Associates CPAs, PC

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December 5, 2020

When filing taxes, married couples must make an important decision: should they file jointly or separately? This decision can significantly impact your tax liabilities, deductions, and potential refunds.

Understanding the nuances of each filing status is essential for making an informed choice. Here’s what you need to know.

Filing statuses available to married couples.

First, let’s start with what it means to be “married” according to the IRS. The IRS determines your marital status on the last day of the tax year. For example, if you get married on December 31, 2023, the IRS treats you and your spouse as if you were married for all of 2023. Likewise, if your divorce is finalized on December 31, the IRS considers you unmarried for the entire year.

If you’re legally separated from your spouse under a “separate maintenance” agreement, the IRS considers you unmarried, and you can choose the single or head of household tax filing status.

Assuming you are legally married in the eyes of the IRS, you have two tax filing statuses to choose from.

Married filing jointly (MFJ)

The married filing jointly status allows married couples to combine their income and deductions on a single tax return. It is often the default choice for many couples, as it usually results in lower tax liability and eligibility for various tax credits and deductions.

However, when you choose the MFJ filing status, you’re both responsible for any income taxes, interest, or penalties due to the IRS (and your state and local tax authorities).

You can choose the married filing jointly filing status if your spouse passed away during the year and you haven’t remarried or you’re in a common law marriage recognized by your state.

Married filing separately (MFS)

Under this status, each spouse files their own tax return, reporting only their share of income, deductions, and credits. Each spouse is also responsible for their own tax debt and any interest and penalties that apply and receives their own tax refund.

It sounds pretty simple, but couples who live in a community property state—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—must split all their taxable income and deductions 50/50 unless they live apart all year.

Married filing separately also means deciding whether both couples will itemize or claim the standard deduction. If one spouse chooses to itemize deductions, both must itemize, even if it results in a higher tax liability for one spouse.

Filing separately can also mean losing out on several potentially valuable tax breaks, which we’ll cover in more detail below.

For these reasons, married filing separately is less commonly used. In fact, according to an analysis by the Baker Institute, the married filing separate tax status was only used on 2.38% of the federal income tax returns filed in 2020, compared to 33.61% for married filing jointly. Still, it can be beneficial in certain situations.

When does filing separately make sense?

In some situations, filing separately makes sense, even if it’s more complicated. Here are a few examples.

You want to separate your tax liabilities.

If one spouse has significant tax debts, owes back child support, or is at risk of being audited by the IRS, filing separately can protect the other spouse from these liabilities.

For example, if your spouse owes back taxes, you might want to file separately to avoid having your refund seized by the Treasury Offset Program (TOP) to cover that debt. TOP is a government-run program to collect past-due and delinquent debts owed to state and federal agencies. It allows the federal government to withhold money from federal payments, such as tax refunds or Social Security benefit payments, and send it to federal and state agencies.

Medical expenses

If one spouse has substantial medical deductions, filing separately might be advantageous since medical expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income (AGI). A lower AGI on a separate return might make more expenses deductible.

Lower combined tax liability

While it’s rare for couples to pay a lower overall tax liability when filing separately, it does happen occasionally. A spouse with a significantly lower income or more deductions may qualify for a lower tax bracket. In these cases, filing separately can sometimes result in a lower combined tax bill.

Personal preference or legal reasons

Some couples may choose to file separately for personal or legal reasons, such as when they’re in the process of divorce. You may also want to file separately if you’re concerned that your spouse isn’t filing their taxes accurately. Filing separately means you won’t be on the hook for potential tax evasion penalties.

You’re repaying federal student loans

Some income-driven repayment plans on student loans calculate your monthly payment based on your income alone when you file separately. In these cases, filing separately may mean more manageable student loan payments.

Case in point, an article in the Wall Street Journal featured a married couple who filed separate tax returns and was able to reduce their student loan payments by $760 per month and potentially have 85% of the original loan balance—roughly $170,000 in student loan debt, in this case—forgiven atener 10 years of payments.

One spouse owns a business

If one spouse owns a business, they may be able to take advantage of the qualified business income deduction, which allows small business owners to deduct 20% of their business income on their individual tax return. This tax deduction gets phased out for high-income taxpayers, so splitting your income might allow the business-owning spouse to qualify for the deduction.

What tax breaks are lost when married filing separately?

Choosing the MFS status means losing certain tax breaks, including:

  1. Education credits. Tax credits for education, including the American Opportunity Tax Credit and Lifetime Learning Credit, are not available for MFS filers.
  2. Earned Income Tax Credit (EITC). This valuable credit for low- to moderate-income taxpayers is unavailable under the MFS status.
  3. Child and Dependent Care Credit. Generally, couples filing separately cannot claim this credit.
  4. IRA Contributions. The deduction for contributions to a traditional IRA is more limited for MFS filers, especially if either spouse is covered by a retirement plan at work. Also, married couples filing separately can’t make Roth IRA contributions if their modified AGI is more than $10,000 and they lived together at any time during the year.
  5. Student loan interest. Filing separately means losing out on this above-the-line deduction.
  6. Adoption expenses credit. Choosing the MFS filing status when you have qualified adoption expenses means you can’t claim the adoption credit or exclude employer-provided adoption assistance benefits from your taxable income.

Can you change your filing status on a previous tax return?

If you realize you chose the wrong filing status on a previous return. You may be able to change it.

Married filing separately to joint returns

If you filed separate tax returns but want to change to filing jointly, you have three years from the due date of the original return to file an amended return.

This can be a good move if you would qualify for a bigger tax refund under a joint tax return.

Married filing jointly to separate returns

Unfortunately, you can’t change a return from married filing jointly to married filing separately unless you make the change before the original filing date, not including extensions.

For example, say you filed your tax return for the 2023 tax year on March 1, 2024. You can file an amended return before the April 15th deadline to change your filing status.

You’re not completely out of luck if you filed a joint return and the IRS later audits your return and assesses additional taxes, penalties, and interest due to inaccurate information provided by your spouse. You may qualify for innocent spouse relief using Form 8857.

Qualifying for innocent spouse relief can help you escape IRS penalties. However, to qualify, you must prove you weren’t aware of the errors when you signed the return.

Should you file taxes jointly or separately?

Deciding whether to file jointly or separately as a married couple depends on your individual financial situation, potential tax liabilities, and personal preferences. While filing jointly is often more beneficial due to lower tax rates and higher deductions, there are scenarios where filing separately could be more advantageous.

Fortunately, determining whether filing taxes jointly or separately is the best option is usually not too complicated. You don’t have to spend hours preparing three tax returns—one joint and two separate—to see which filing status results in the lowest tax liability. Most tax software allows you to compare filing statuses to see which one results in a lower tax bill.

Remember, tax laws can change, and individual situations can vary greatly, so seeking advice from a trusted tax professional is always a wise approach to tax planning and filing. If you need help, schedule a free consultation with Hood & Associates. We can analyze your specific circumstances and help you make the best decision for your financial health.

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