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Review Restrictions on Married Filing Separately
Married filing jointly is the more common way for couples to file, and there are plenty of reasons why that is so, including access to deductions and credits. But that isn't true for every couple. Sometimes filing separately makes more sense. Living in a community property state, tax liens on one spouse or restrictions on claiming deductions could make the decision about how you file easier or harder. Here’s what you have to consider each of these issues:
Prohibited Deductions and Credits
Filing as married filing separately prohibits you from claiming student loan interest deductions, tuition and fees deductions, education credits, and earned income credits. You could reduce your tax refund or raise your tax bill by more than a thousand dollars by filing separately. 2
If you're married filing separately, both spouses must either itemize or take the standard deduction. You can't do the opposite of the other spouse, even if it would be more beneficial as an individual taxpayer.
The married filing separately tax choice also limits your options on taking itemized or standard deductions. For instance, if one of you has enough deductions, such as property taxes or medical expenses, to itemize their tax return, the other spouse has to itemize, as well, even it that person would lose out on the Tax Cuts and Jobs Act's generous standard deduction. If the deductions are big enough—especially if it's the less well paid spouse who had, say, $40,000 in medical expenses for the year—the filing-separately choice may be worth it.
Please note the source of funds is highly important in this type of situation. According to the IRS, "if you and your spouse live in a noncommunity property state and file separate returns, each of you can include only the medical expenses each actually paid. Any medical expenses paid out of a joint checking account in which you and your spouse have the same interest are considered to have been paid equally by each of you, unless you can show otherwise." 3
Living in a Community Property State
If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin, you will have to deal with a whole set of complicated rules to decide what is considered community or marital income, and what is considered your income.2 4
The rules can vary by state. Your combined income could be split equally between the tax returns and negate the purpose of filing separately. Consider using a reputable tax software—or hiring an accountant—if you live in a community property state and want to file separately.
Discuss All Possible Tax Liens
One reason many married couples do file separately is that they have prior debt that is past due which could be deducted from their tax refund. This includes past-due child support, past-due student loans, or an unpaid tax liability one spouse incurred before the marriage.
The good news: Filing separately because of prior tax liens may not be necessary. The couple can file IRS Form 8379, Injured Spouse Allocation each year with their married-filing-jointly tax return until the spouse with liens gets caught up on their debt.5 This keeps the spouse who doesn't have the debt from being penalized for being on the return and losing out on their share of any tax refund. Plus, by filing jointly, the couple can still declare deductions and credits not available to those filing separately.
Consider the Income Factor
When one spouse makes more than the other, the marginal tax rates for both of them could be the best wedding present they've ever received.
For instance, let's say Julie and Jane get married on December 27, 2019. Julie is a marketing manager whose taxable income in 2019 will be $55,000. Jane completed her MBA on December 15, 2019, and will have taxable income from her fellowship of $8,000. If she hadn't married Jane—or if she did her taxes as married filing separately—Julie would have had to pay 22% of her taxable income above $39,475 in taxes. Together and filing jointly, their marginal tax rate will be 12% for 2019. What's more, they will get to claim the deductions and credits that would be prohibited for married filing separately.
Gather All Needed Documents for Filing
Both spouses need to gather receipts and paperwork that support their deductions and credits. For example, you need backup prove you can take student loan interest deductions.
Prepare Two Tax Returns (or Ask an Accountant)
If which option to choose isn't obvious, practice preparing your taxes for both filing options: married filing jointly and married filing separately. Doing so may take an extra couple of hours using a tax software, but the potential savings are worth it. Some tax software will automatically determine which method will yield the lowest tax liability based on your inputs. You could, alternatively, ask an accountant which option is best based on your individual circumstances.
The Bottom Line
If you file married filing separately, you are going to endure a more complicated tax process, especially if you live in a community property state. You will also likely lose out on key deductions and credits. On the other hand, if one spouse has significant deductible expenses—or liens against them—filing separately might make sense.
When the answer isn't obvious, take the time to try out both options by filling out practice forms, then choosing the way that works best. And since one of the biggest reasons couples fight is money, the tax advantages to filing as a married couple is the best wedding present the IRS could give you.
Married filing jointly is the more common way for couples to file, and there are plenty of reasons why that is so, including access to deductions and credits. But that isn't true for every couple. Sometimes filing separately makes more sense. Living in a community property state, tax liens on one spouse or restrictions on claiming deductions could make the decision about how you file easier or harder. Here’s what you have to consider each of these issues:
Prohibited Deductions and Credits
Filing as married filing separately prohibits you from claiming student loan interest deductions, tuition and fees deductions, education credits, and earned income credits. You could reduce your tax refund or raise your tax bill by more than a thousand dollars by filing separately. 2
If you're married filing separately, both spouses must either itemize or take the standard deduction. You can't do the opposite of the other spouse, even if it would be more beneficial as an individual taxpayer.
The married filing separately tax choice also limits your options on taking itemized or standard deductions. For instance, if one of you has enough deductions, such as property taxes or medical expenses, to itemize their tax return, the other spouse has to itemize, as well, even it that person would lose out on the Tax Cuts and Jobs Act's generous standard deduction. If the deductions are big enough—especially if it's the less well paid spouse who had, say, $40,000 in medical expenses for the year—the filing-separately choice may be worth it.
Please note the source of funds is highly important in this type of situation. According to the IRS, "if you and your spouse live in a noncommunity property state and file separate returns, each of you can include only the medical expenses each actually paid. Any medical expenses paid out of a joint checking account in which you and your spouse have the same interest are considered to have been paid equally by each of you, unless you can show otherwise." 3
Living in a Community Property State
If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin, you will have to deal with a whole set of complicated rules to decide what is considered community or marital income, and what is considered your income.2 4
The rules can vary by state. Your combined income could be split equally between the tax returns and negate the purpose of filing separately. Consider using a reputable tax software—or hiring an accountant—if you live in a community property state and want to file separately.
Discuss All Possible Tax Liens
One reason many married couples do file separately is that they have prior debt that is past due which could be deducted from their tax refund. This includes past-due child support, past-due student loans, or an unpaid tax liability one spouse incurred before the marriage.
The good news: Filing separately because of prior tax liens may not be necessary. The couple can file IRS Form 8379, Injured Spouse Allocation each year with their married-filing-jointly tax return until the spouse with liens gets caught up on their debt.5 This keeps the spouse who doesn't have the debt from being penalized for being on the return and losing out on their share of any tax refund. Plus, by filing jointly, the couple can still declare deductions and credits not available to those filing separately.
Consider the Income Factor
When one spouse makes more than the other, the marginal tax rates for both of them could be the best wedding present they've ever received.
For instance, let's say Julie and Jane get married on December 27, 2019. Julie is a marketing manager whose taxable income in 2019 will be $55,000. Jane completed her MBA on December 15, 2019, and will have taxable income from her fellowship of $8,000. If she hadn't married Jane—or if she did her taxes as married filing separately—Julie would have had to pay 22% of her taxable income above $39,475 in taxes. Together and filing jointly, their marginal tax rate will be 12% for 2019. What's more, they will get to claim the deductions and credits that would be prohibited for married filing separately.
Gather All Needed Documents for Filing
Both spouses need to gather receipts and paperwork that support their deductions and credits. For example, you need backup prove you can take student loan interest deductions.
Prepare Two Tax Returns (or Ask an Accountant)
If which option to choose isn't obvious, practice preparing your taxes for both filing options: married filing jointly and married filing separately. Doing so may take an extra couple of hours using a tax software, but the potential savings are worth it. Some tax software will automatically determine which method will yield the lowest tax liability based on your inputs. You could, alternatively, ask an accountant which option is best based on your individual circumstances.
The Bottom Line
If you file married filing separately, you are going to endure a more complicated tax process, especially if you live in a community property state. You will also likely lose out on key deductions and credits. On the other hand, if one spouse has significant deductible expenses—or liens against them—filing separately might make sense.
When the answer isn't obvious, take the time to try out both options by filling out practice forms, then choosing the way that works best. And since one of the biggest reasons couples fight is money, the tax advantages to filing as a married couple is the best wedding present the IRS could give you.
