The common wisdom is that married couples generally choose the Married Filing Jointly (MFJ) over Married Filing Separately (MFS) status when filing their tax returns. Although this is a smart tax strategy in most situations, understanding both filing options will help you understand when filing jointly or separately is in your best interest.
Married Filing Jointly
The benefits of filing jointly for a married couple are quite substantial. Married couples benefit from increased deductions and credits available on a joint return. Those same deductions and credits will either be limited or unavailable if they filed separately. These deductions and credits include the earned income credit, child tax credit, child and dependent care credit, student loan interest deduction, elderly and disabled credit, and education deductions and credits, as well as adjusted gross income (AGI) phase-out thresholds for traditional IRA deductions.
Married couples with average individual incomes also benefit from lower tax brackets than do single filers. Couples that file jointly are also eligible to deduct IRA contributions much more easily. This is because they can usually make the income requirements that may be more difficult for a single filer.
If you are used to claiming itemized deductions on your tax return, then filing jointly will probably be the easy choice. Both spouses (whether filing jointly or separately) need to file in the same manner. That means one spouse cannot itemize their deduction unless the other spouse does the same. Remember, married couples often file jointly for the simple ease and convenience of one tax return.
Unemployed Spouses – If one spouse is unemployed and not earning any income, it is usually best to choose Married Filing Jointly. That way, you both get the $3,950 personal tax exemption, which can help lower your tax bill.
Married Filing Separately
It should be natural for married couples to file their tax returns jointly, right? Although many married couples simply file jointly because they feel a personal need to do so, sometimes it will actually negatively impact their tax liability.
When it comes to the IRS and tax liabilities the romantic notion of love and togetherness should be thrown out the window. There are several situations where Married Filing Separately can actually lower your tax obligations, or protect you or your spouse.
High Net Income Earners – High earners should generally file separately if they fall in the top tax brackets. While tax rate disparities among the lower two tax brackets were changed to affect the tax savings for joint filers, the same is not true for the upper tier tax brackets. A single filer with an annual income of $75,000 in 2013 would pay a maximum tax rate of 25%; yet the same married person filing jointly would fall in the 28% tax bracket, affecting an extra 3% in tax liability. Furthermore, a single filer can make up to $182,000 before moving into the next tax bracket; whereas the same threshold for a married person that files jointly is only $111,000.
Not a Perfect Union – Those married couples that are starting to taste the bitterness of marriage may prefer to file separately. This includes couples that are legally separated, which legally requires them to file separate tax returns. Couples that are in the process of divorcing should consider separate filing to prevent tax complications in the following year, as well as to protect themselves during the divorce proceedings.
Large Medical Bills – For a married individual who has a large one-time medical bill, it may be better to file separately for that year because the medical expenses must exceed 10% of their AGI to be deductible. In cases like this, a joint couple’s higher income could prevent them from deducting the unreimbursed medical expenses. Filing separately could therefore bring a significant tax savings.
Liability Concern – If you suspect your spouse of illicit activity that may equate to legal action, it may be better to file separately to avoid implicating yourself in any illegal matters.
Deciding whether to file jointly or separately is an important decision. While most married couples choose to file joint returns, being aware of the situations that call for separate filing could save you thousands of dollars.