About once a year, typically during tax season, I get asked if it is better to file jointly or separately. As my answer is to many things tax – it depends. There are reasons for filing as married filing separate (MFS) but most taxpayers will see more financial benefit filing as married filing jointly (MFJ). In this post I will explore some advantages and disadvantages of each filing status.
The tax law is written in a way that penalizes taxpayers who choose to file separately. Some credits are cut in half, such as the child tax credit and the credit low-income workers receive for making retirement plan contributions. The earned income credit, American Opportunity tax credit, and Lifetime Learning credit are not available to MFS taxpayers at all. Taxpayers filing as MFS are only allowed a $1,500 capital loss deduction instead of $3,000, and cannot deduct student loan interest. These are just some of the limitations placed on taxpayers filing MFS.
An important choice impacting this discussion is the role itemized and standard deductions have. If Fred, who itemizes, choosing MFS status Wilma must also itemize. By the same token if Fred uses the standard deduction Wilma must also, but the standard deduction for both is cut in half. Do you see the game here? Say together the couple has $30k of itemized deductions. If Fred itemizes and deducts the $30k you might think Wilma could utilize the $12k standard deduction (remember the standard deduction ($24k) is cut in half for MFS taxpayers). Congress was keen to this when the law was made which is why both taxpayers must use the same itemized or standard deduction choice i.e. no double dipping.
There are many reasons for filing as MFS. If Fred’s income is low and has significant itemized deductions that are phased out by adjusted gross income (AGI) and Wilma has few itemized deductions but high income it can make financial sense to file separately. In this scenario Fred would get to deduct more of his itemized deductions than he would filing jointly because if Wilma’s income was included with Fred’s return, (MFJ), Fred’s deductions may get phased out. The term “phased out” means benefits in the tax code that are taken away as the taxpayer’s income climbs. This is the government’s way of saying, “the more money you made in a given tax year, the fewer deductions you need which results in more tax we think you can afford to pay”.
Taxpayers may choose to file separately to keep their finances separate. Some couples prefer to keep their income and the resulting taxation distinct. Fred may believe in his mind that having Wilma’s income included with his would cause Fred to unjustly pay some of Wilma’s tax bill. Another reason for the MFS status is one spouse doesn’t trust the other spouse. If Fred believes Wilma is hiding illegally obtained forms of income Fred might feel more comfortable not signing a MFJ tax return he believes to be inaccurate or fraudulent.
Sometimes income driven repayment plans on student loans can cause an advantage using MFS. If Fred has high income and Wilma low income, if they file separately, it may benefit Wilma since the student loan repayment plan would look at her income only since the return only included her income.
When asked which filing status is better there is a report available within the software I use that shows the analysis between both filing statuses for that tax year. It is very clear and lists both scenarios in a column format that is easy to understand. This gets reviewed each year with the processing of the returns.
All of this sounds complex and it is. Sometimes there are reasons outside of pure financial benefit that causes a taxpayer to go down the MFS route. In rare cases the overall tax might be lower filing as MFS. For a majority of taxpayers MFJ is the route to go. Contact me if you have any questions.