For over a century, the newly wed have merged their tax situations, perhaps without a second thought. As times have changed, however, two individuals blending their tax situations is not always the no-brainer it may once have been. For many couples, each has sources of income, deductions, and other tax-related positions that they bring to the table. Many married couples do not merge their finances, making filing joint taxes confusing, complicated, and a point of contention. On the tax law side, there are many built in disincentives for married couples filing separately. These, however, must be weighed against important non-tax reasons why you may not want to file a tax return with someone else. Further, because the US tax code is just plain idiotic at times, combining taxes with another person can result in outcomes that aren’t necessarily obvious from looking at either party’s separate circumstances. With all this in mind, it’s no wonder many folks are confused about the implications of tax return filing options with their spouses.
Let’s look at the benefits of each option.
Pros of a joint filing
- In most circumstances, a joint filing results in paying less taxes as there are numerous penalties against filing separately. Examples include the disallowance of the student loan interest deduction, the disallowance of child-related tax credits and the earned-income credit, the (effective) disallowance of Roth IRA contributions, and so on. In most circumstances, filing a joint return with your spouse will result in an overall tax savings due to these and other differences.
- You don’t have the added task of determining the split of joint income and deductions between two separate returns, e.g., brokerage account investment earnings for accounts held jointly, community property income, etc. Overall, filing one return is easier than filing two.
When to consider separate filings
- A spouse with low income and high deductions may receive a tax benefit from such deductions that would otherwise be disallowed in a joint filing due to income limitations.For example, medical expenses are only deductible once they exceed 7.5% of Adjusted Gross Income. If one spouse was out of work most of the year due to health reasons and not fully covered by insurance, while the other spouse was a high earner who worked the full year, filing separately may result in an overall tax savings.
- A spouse repaying student loans under an income-driven repayment plan may experience a significant increase in monthly payments by filing jointly with a spouse.
- For couples who keep their finances separate, also keeping their taxes separate can help keep peace in the home if both are willing to (likely) pay more in taxes.
- Each spouse is considered jointly and severally liable for tax, interest, and penalty due on a jointly-filed return. For separate returns, each spouse is responsible only for his/her own taxes. This is super important for divorcing couples to keep in mind. Many divorced couples will file one last joint return for the year before the divorce without considering that there is a reason you are divorcing this person – do you want your name on their tax return? Yes, sometimes an ex-spouse is able to have their responsibility waived under the Innocent Spouse Rules, but do you want to fight to have those rules applied to you? The IRS wants its money and doesn’t care who agreed to cover the taxes in the divorce decree. (Note that living in a community property state complicates things, even when separate returns are filed.)
- Even for couples who share finances and have the best of relationships, separate filing may be desirable when one spouse has issues with the IRS such as owing back taxes. For example, an overpayment on a joint return will likely be used to pay taxes for an out-of-compliance spouse rather than refunded. The spouse with no outstanding tax debts may qualify as an Injured Spouse and receive the refund, but again, there’s some work to be done to make that happen.
- With the sweeping tax law changes under the Tax Cuts and Jobs Act of 2017, many pass-through business owners qualify for the 20% Qualified Business Income deduction. Due to income phaseouts for claiming the deduction in certain circumstances, filing separately may allow one or both spouses to claim the deduction whereas filing jointly may preclude one or both spouses from claiming the deduction.
Good to know
- Under a separate filing scenario, both spouses must either itemize deductions or take the standard deduction.
- Under a separate filing scenario, each spouse generally must file if he/she had more than $5 of income. In other words, only a spouse who had absolutely no sources of income in a year would not be required to file a return if his/her spouse filed a Married Filing Separately return.
- Your marital status for the tax year is generally whatever your marital status is on December 31stof that year. If your spouse passed away during the year, you will generally still be considered married on December 31stfor purposes of tax return filing status.
- Folks who are separated are generally considered married for the year if they have not obtained a final decree of divorce or separate maintenance by December 31st. An exception to this would be taxpayers who meet the abandoned spouserules and are allowed the more favorable Head of Household filing status rather than the Married Filing Separately status.
- Your relationship must qualify as a marriage under state or foreign laws to be considered a marriage for federal income tax purposes.
- If you and your spouse filed separate returns, you may be able to amend for a joint filing if within the statute of limitations, which is generally 3 years from the due date of the separate return(s). On the flip side, you can amend to file separately after a joint filing, but generally only up to the due date of the tax return.
- Non-US citizens have special rules regarding filing status and many other tax matters beyond the scope of this article.
Choosing between the Married Filing Jointly and the Married Filing Separately statuses remains a relatively straightforward decision for the majority of married taxpayers. Each situation is unique, however, and it’s always worth a discussion with your tax advisor as to the benefits and drawbacks of your options.