Are you married? Or thinking about it?
Wondering what the difference is between the tax filing statuses Married Filing Jointly vs. Married Filing Separately?
I know I once did. You would see Single, Head of Household, and Married Filing Jointly as relatively logically structured. For tax brackets, the Married Filing Jointly status was roughly twice that of the Single filers. Same for the standard deduction. Logical.
Then you got to Married Filing Separately and everything starts to crater. The limits, the phaseouts, the brackets – they don’t fall back to Single filer levels but often they fall even lower.
I wanted to understand why, so I dug deeper.
For the vast majority of married taxpayers, the best filing status will be married filing jointly. But there are some situations where married filing separately can produce a lower overall tax liability. It’s more the exception than the rule, but there are times when it produces a clear benefit. Let’s investigate.
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The Basics of Married Filing Separately
There’s no question, married filing jointly is the simpler of the two tax filing statuses.
You combine your incomes, your deductions, and every other factor that affects your tax situation. You file one tax return, and either pay one tax amount due or receive a single refund.
Married filing separately complicates things on several fronts. Obviously, you’ll need to file two tax returns, which will be both more time-consuming and cost more if you are using a paid tax preparer.
In an oversimplified sense, it’s almost as if you and your spouse are filing as single individuals. That’s certainly true in that you’ll only include income and deductions items that relate to each of you individually. But you also lose certain tax benefits that are common to both single filers and couples who file as married filing jointly.
But if you’re married, you have the choice to file with either married filing separately or married filing jointly. You can choose the one that works best for you. And since you have a choice, you can crunch the numbers and see if it works to your advantage.
The Challenges of Married Filing Separately
The fundamental problem with married filing separately is that the tax code is set up specifically to discourage it. When you file separately, you lose certain benefits.
IRA contributions are a major example (2020 tax year figures):
- If your spouse is covered by a retirement plan at work, and you are not, your IRA contribution will not be tax deductible if you earn more than $10,000 and file separately. By contrast, if you’re married filing jointly, you’d be able to take a full deduction with a combined income of up to $196,000.
- The situation is even more extreme with a Roth IRA. If you’re married filing jointly, you can each make a full Roth IRA contribution with a combined income of up to $196,000. But if you file separately, you can’t make any Roth contributions at all if your income exceeds $10,000.
Social Security is another example. If you’re married filing jointly, the first $32,000 of your Social Security benefit is exempt from federal income taxes. But if you’re married filing separately, there is no exemption. Your entire Social Security benefit is taxable.
Other tax benefits that may be affected by filing separately include the earned income credit, the deduction for college tuition expenses, and the student loan interest deduction.
But there’s one other factor they may be more important than all others. If you file separately and plan to itemize deductions, your spouse will also need to itemize. If you plan to take the standard deduction, your spouse must also take the standard deduction. Since itemized deductions are one of the major reasons for filing separately, this could be a major limitation.
The Benefits of Married Filing Separately
The first major benefit of filing separately is keeping your tax situations separate. Why might this be necessary? You might want to maintain a completely separate tax status if you suspect your spouse maybe creating potential tax problems.
For example, let’s say your spouse is self-employed and you’re salaried. You’re concerned that your spouse is either hiding income or significantly overstating business expenses. To avoid assuming your spouse’s potential tax liability upon a likely audit, you may want to file separately to protect yourself.
But a more common reason to file separately is itemized deductions. It can be a benefit to file separately if one spouse has higher itemized deductions than the other.
A good example may involve medical expenses. For 2020, medical expenses are tax-deductible to the extent they exceed 7.5% of adjusted gross income. Let’s say a married couple has an adjusted gross income of $100,000, but one spouse has $70,000 in income, and the other has $30,000 in income and $10,000 in medical expenses.
If they filed jointly, only $2,500 in medical expenses would be deductible ($10,000 minus [$100,000 X .075%]). But If they file separately, the lower earning spouse would be able to deduct $7,750 ($10,000 minus [$30,000 X .075%]).
Now the calculation would be more complicated than that. For married filing separately to work, each spouse needs to be able to deduct amounts that collectively exceed the $12,400 threshold for the standard deduction. It doesn’t always work, which is why filing separately is rare.
Another limitation is if you live in a community property state. In most community property states, each spouse is usually required to report half the total income and half the total deductions on each state income tax return. That may nullify the advantage of married filing separately.
How to Determine if Married Filing Separately is the Better Option for You
As you might have guessed, the decision to go with married filing separately is complicated, and can depend on any number of factors that are not immediately obvious.
Fortunately, if your return is being prepared by a professional tax preparer, a married filing jointly versus married filing separate analysis will be performed. And if you use a tax preparation software, the analysis is usually a standard process.
What it comes down to is that you don’t need to sit and crunch numbers or analyze the tax code to see if filing separately makes sense. Either your tax preparer or your tax preparation software should handle that for you.
As the tax code becomes increasingly complicated, tax software becomes more important each year.
When you have good software, you don’t need to worry about issues like married filing jointly vs. married filing separately. The tax software will do the analysis, and give you the better of the two filing statuses if you have the option to choose.