For most married couples, you have two options on how to file your taxes: jointly or separately. For a few married people, filing as head of household can be the best option. If you file your taxes jointly, you report all your income and deductions on one tax return. If you file separately, just like it sounds, you report your income and deductions on separate tax returns. Your income and deductions on your tax return, and your spouse’s income and deductions on their tax return.
When you file separately, the IRS assumes you are filing separately to pay less income taxes, which is not always the case. But regardless of the reason, the IRS punishes you. If filing separately, you will qualify for less credits and deductions. And, if one spouse takes the itemized deduction, the other spouse must itemize as well. If the spouse required to itemize has zero deductions, then they get a $0 deduction. Ouch!
So, if you are punished for filing separately, you may be thinking when would it be in our best interest to file separate tax returns. Below, we will discuss four main reasons married couples choose to file separate tax returns: keep finances separate, high wage income earners, out-of-pocket medical expenses and student loans.
There can be many reasons couples want to keep their finances separate, including taxes. Maybe your spouse is financially irresponsible, or you are separated or possibly going through a divorce. Whatever the reason, sometimes the pros outweigh the higher tax bill.
When you file married filing jointly, both spouses have joint and several liability. This means both spouses, regardless of which one is responsible, is liable for any tax owed. Because married filing jointly is used by most married couples due to the lower tax bill and ease of filing only one tax return, this is usually not discussed until someone is adversely affected. The IRS even has a form, Request for Innocent Spouse Relief, affected spouses can use to ask the IRS for relief.
Also, couples that are separated but still married on December 31 have the option to file as married filing jointly or separately. It is your marital status at the end of the year that determines your tax filing options. Although many people going through a divorce prefer to file separately, depending on your tax situation, it may greatly benefit you to file jointly, if you can agree.
In some situations, married people will qualify to file as head of household. Filing as head of household provides a larger tax deduction intended to help single people with dependents. To qualify while married, you must:
If you meet all five of these requirements, you can file as head of household even while legally married.
The tax rate is graduated based on our income. For married couples, the tax rate thresholds are nearly doubled. Although this doesn’t occur a lot, sometimes when a high wage income earner is married to a low wage income earner, it can result in less tax being paid if they file their taxes separately. Although there are some calculators available, the best way to determine if this is the best move for you is to complete your taxes both ways. This means you need to complete three tax returns:
Once all three tax returns are completed, you will be able to assess your tax liability filing separately versus filing jointly and determine the best way for your spouse and you to file.
If you fall into this category, it is highly recommended you reach out to a tax professional to confirm the best filing status to use, as you may be giving up certain tax credits and deductions unnecessarily. For most people filing jointly is going to result in the best outcome. If you file married filing separately, you have around three years depending on when you filed to amend your tax return and change your filing status to married filing jointly. However, if you filed as married filing jointly, the time you have to amend your tax return to change your filing status is much shorter. You must do so prior to the original filing deadline, which for most years is April 15th. If you wait until the last moment and file your original tax return on the filing deadline, then you would not be able to amend your filing status from jointly to separately.
Despite the advantages that come with filing jointly as a married couple, sometimes it may be advisable to file separately if you or your spouse has significant medical expenses. This is because the IRS only allows you to deduct expenses that exceed 7.5% of your adjusted gross income (AGI) in 2020. (Keep in mind that you can only include your medical expenses that were paid for during that year, and anything insurance paid for does not count.) This can make it difficult to claim most of your expenses if you and your spouse have a high AGI.
Example. You made $50,000 in 2020 and have $10,000 in medical expenses. This would meet the 7.5% threshold because $10,000 is 20% of your income. However, if you instead made $135,000 in 2020, you would not be eligible because $10,000 is only 7.4% of your total income.
In the end, although filing separately could offer larger medical-expense deductions, it may come at the cost of other tax breaks. It is important to keep good records and speak to an experienced tax professional to figure out what is best for you.
If your spouse or you have federal student loans on an income-based repayment plan, it may be in your best interest to file your taxes separately depending on your income, repayment plan, and goals. If you file as married filing jointly, the student loan payment may be based on both of your incomes if your student loan payment is based on an income-driven plan. If you file separately, your student loan payment will be based on your income.
Your spouse may not want to give up 10-15% of their discretionary income to pay down your student loans. You may not want your spouse to give up 10-15% of their discretionary income! However, you will need to weigh the pros and cons of both: how it will affect your student loans and / or student loan payment and your tax liability. For example, if filing separately causes you to pay almost the same amount or more in taxes as it saves you on your student loans, it is best for most couples to file jointly and use that money to pay off your student loans faster rather than giving it to the IRS.
The IRS strongly encourages married couples to file joint tax returns. Filing a joint tax return can be a win-win! Less work for the IRS! Less work for you! You only need to file one tax return, not two. And, by filing jointly, the IRS gives you additional tax credits and deductions. File separately, and the IRS takes away credits and deductions that you may have otherwise qualified to take. Make sure you choose the correct filing status and have a tax plan to amend your filing status because you cannot change your filing status from jointly to separately after the original filing deadline.
Determining the best tax filing status can be difficult. Taking time to carefully plan can save you hundreds and sometimes even thousands. If you are not sure of the best filing status to use, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group. They will review your tax situation and determine the best way for you to file based on your individual circumstances.