Filing taxes can be complicated for married couples. While most opt to file jointly, there are situations where filing separately makes more financial sense. Filing separate tax returns as a married couple can provide tax advantages in specific cases, although it also comes with drawbacks to consider.
When Can Filing Separately Make Sense Financially?
Filing separately may benefit couples when:
One Spouse Has High Medical Expenses
If one spouse racks up significant out-of-pocket medical bills, filing separately can allow them to qualify for larger medical expense deductions. Taxpayers can deduct qualified medical expenses that exceed 7.5% of their adjusted gross income (AGI) .
For example, if Spouse A has $50,000 in AGI and $10,000 in medical bills, they cannot claim a deduction by filing jointly if the couple’s combined AGI is above $133,333. However, by filing separately, Spouse A can potentially deduct $7,500 in expenses.
Always calculate taxes both ways to determine if separate filings make sense. Weigh the medical deduction against loss of other tax credits only available to joint filers.
Lower Student Loan Payments
Filing separately excludes a spouse’s income when calculating income-driven repayment amounts for federal student loans. This can significantly reduce monthly payments, especially if there is a large gap in incomes.
However, filing separately makes couples ineligible for certain education credits like the Lifetime Learning Credit and American Opportunity Tax Credit. Run the numbers to see if the lower loan payment outweighs loss of credits that could reduce tax liability.
Pending Divorce
Filing separately shields refunds and limits liability for a spouse’s tax issues during divorce proceedings. It prevents the IRS from seizing a joint refund to pay back taxes or child support owed solely by the other spouse.
Couples planning to divorce should strongly consider filing separately. It simplifies splitting finances and prevents complications when dividing assets.
Other Potential Advantages of Filing Separately
Beyond the main scenarios above, filing separately may also benefit couples when:
- There is a large disparity in itemizable deductions between spouses
- Spouses have similar incomes and filing jointly would push them into a higher bracket
For example, if Spouse A earns $60,000 and Spouse B earns $55,000, filing jointly puts them in the 22% bracket for a portion of income. Filing separately allows both to remain in the 12% bracket, resulting in overall tax savings.
Rules and Restrictions Around Filing Separately
While filing separately can make financial sense in some cases, couples should understand the downsides:
- Both spouses must take the standard deduction or itemize – cannot mix and match
- Loss of tax credits only available to joint filers:
- Child tax credit
- Child care credit
- Education credits
- Limitations around IRAs and retirement accounts
- Possibly higher tax rates and losing wider income bracket thresholds
For instance, the income limit to contribute to a Roth IRA is $144,000 for separate filers, compared to $218,000 for joint filers.
When Does Joint Filing Make More Sense?
Filing a joint tax return with your spouse is right for most married couples for several reasons:
- Joint filing typically results in a lower overall tax liability
- Exceptions may exist in specific situations described above
- Filing process and coordination is simpler with one joint return
- Availability of credits maximized by combining incomes
In community property states, filing jointly also simplifies reporting split income and shared assets. These states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Making the Best Decision for Your Situation
Choosing whether to file taxes jointly or separately as a married couple requires understanding your unique financial situation. Consider factors like:
- Weighing pros and cons of both filing options
- Calculating taxes both ways to determine best route
- Considering impacts to state tax liability
- Getting advice from a tax professional
While filing separately may seem advantageous in some cases, joint filing maximizes credits and deductions for most couples. Thoroughly assess your individual tax picture when deciding on a filing status.
Conclusion
Filing taxes separately as a married couple can provide financial benefits in specific situations. These include cases of high medical bills, student loan debt, or pending divorce.
However, for most married taxpayers, filing jointly results in the lowest overall tax liability. Joint filing also simplifies the process and coordination required.
Carefully evaluating your unique tax situation is crucial when determining the best filing status to maximize tax savings. Consider both filing options and use tax software or a professional to crunch the numbers.