When 'Married Filing Separately' Makes Sense
For most, filing jointly is the best option, but in rare instances filing apart from your spouse could lower your tax bill.
Question: Every year when I do my taxes I notice the "married filing separately" option under filing status. In what circumstance would I be better off choosing this over "married filing jointly"?
Answer: For the vast majority of married taxpayers, "married filing jointly" is the way to go. In fact, just 4.5% of married couples filed separately for the 2009 tax year, the most recent annual data available. That represented 1.8% of all returns filed that year.
One of the main benefits to filing jointly, aside from simplicity, is that it entitles the filers to use a variety of tax breaks, including education credits such as the lifetime learning credit, deductions for student loan interest, and the credit for child- and dependent-care expenses. Married couples who file separately typically cannot use these credits and deductions, meaning that they might be forfeiting significant tax savings.
For married couples in which one spouse earns considerably more than the other, joint filing also might take better advantage of tax-bracket structure by keeping more of the high earner's income in a lower bracket. For example, if one spouse has a taxable income of $90,000 and the other a taxable income of $40,000, their combined income of $130,000 puts them in the 25% bracket. But if they file separately, the spouse earning $90,000 moves up to the 28% bracket, meaning that about $20,000 in income is taxed at the higher rate (based on 2011 brackets and rates).
Taking Advantage of Certain Deductions
For some married taxpayers, however, filing separate returns might be worthwhile. This is particularly true when spouses' disparity in income allows them to take advantage of tax breaks that otherwise would not apply. For example, let's say one spouse has an adjusted gross income of $100,000 per year and the other has an adjusted gross income of $25,000 per year, and that the lower earner accrues $5,000 in unreimbursed medical bills that year. The tax code allows for deduction of medical expenses that exceed 7.5% of your adjusted gross income (after other deductions are subtracted). That $5,000 represents just 4% of the couple's combined income, but 20% of what the lower-earning spouse made alone. Therefore, filing separately makes sense in this case as long as this deduction outweighs the tax savings offered by filing jointly.
Jackie Pearlman, a tax research analyst with The Tax Institute at H&R Block (HRB), says such a scenario has become more common in recent years with more people out of work. "So normally you would have two high-income earners. But one of you has lost a job, so you've got high COBRA expenses," she says.
Spouses with unreimbursed employee business expenses might choose to file separately for similar reasons. To qualify for this deduction, expenses must total more than 2% of adjusted gross income. This might benefit, in particular, those who work from home, who pay for work-related courses out of their own pockets, and who pay dues to professional groups.
Still another reason a married couple might file separately, Pearlman says, is if one of the spouses works in a different, and lower-tax, state, which could result in an overall lower state tax bill than if they were to file jointly. One important exception to this rule is so-called community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), in which income may be considered a 50-50 split regardless of what each spouse makes individually. Also, some states allow spouses to file separate state income tax returns even if they file a joint federal return. Check the rules for your state or consult a tax professional before making a decision.
Not Just a Matter of Dollars and Cents
Other reasons for filing separately are less about taxes owed than about legal and emotional considerations. Spouses that are separated but not divorced, for example, will typically file under "married filing separately." Spouses with legal concerns--for example, that their partner might give false information or owes back child support that could be taken out of a refund--might also consider filing separately. Some remarried spouses prefer filing separately to avoid commingling assets or "to have separate financial lives," as Pearlman puts it.
Although there are bottom-line considerations for married couples to take into account in deciding whether to file jointly or separately, comfort level also enters the equation. If you're uncertain which filing status to use, try computing your taxes both ways to see what makes the most sense, or consult a tax expert. And don't forget to include the added expense and time of preparing a second return in calculating whether "married filing separately" is the right choice for you and your spouse.
Adam Zoll does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.