What about you two: Married Filing Separately?
For the vast majority of Americans, getting married means filing joint tax returns. According to the latest Internal Revenue Service, in the 2011 tax year, 53.3 million tax returns came in under the category “married filing jointly,” and only 2.6 million were “married filing separately.” Let’s look at the married filing separately tax filing status for clues on when it’s smart to consider it.
Filing Separately Usually Costs More
The main reason why filing separately is so rare is that it almost always costs you more money. The income limits for each bracket when you file separately are exactly half of the amounts for joint filers. That means that unless your respective incomes are close enough to each other, you’ll often end up in different tax brackets if you file separately — and that means that your total tax will be higher than if you filed jointly.
In addition, certain tax credits and deductions aren’t available or have much lower income limits for those who file separately than for joint filers. If you’re eligible for the earned income tax credit, the adoption credit or the child and dependent care credit, you have to file jointly to claim your credit. Phase-out limits also differ for separate filers, limiting the amount you can claim on items like the child tax credit.
Exceptions to the Rule
But in some cases, you can end up better off filing separately than filing jointly:
- You have deductions subject to a percentage of income. Some deductions are tied to your income, letting you deduct only amounts above a certain percentage of what you earn. The most common examples are the itemized deduction for medical expenses, which currently kicks in for most taxpayers above 10 percent of adjusted gross income, and miscellaneous itemized deductions like unreimbursed employee expenses and tax preparation fees that are subject to a 2 percent minimum limit.
- By filing separate returns, the gross income on each return will be lower, potentially allowing you to claim more of those deductions than you would if you filed jointly. If the added benefit from greater deductions outweighs any negative consequences, then you’ll do better filing separately.
- Your income is high enough to subject you to higher tax rates and surtaxes. In 2013, new surtaxes became law for certain high-income taxpayers. Married couples filing jointly and earning more than $250,000 in wages have to pay 0.9 percent of the extra amount as a surtax. Moreover, for joint filers with gross income above $250,000, a 3.8 percent surtax applies to investment income, including interest, dividends, capital gains and other types of income. Higher capital gains rates take effect for joint filers making $450,000 or more.
- The limits for separate filers are half the joint-filing limit. But if each spouse has different mixes of various types of income, there are situations in which you can avoid or lessen the impact of these surtaxes by filing separately. Again, you have to consider the sum total of both spouses’ tax liability.
- You’re concerned about liability. In exchange for the benefits of filing a joint return, couples take on the joint responsibility for unpaid taxes as well as interest and penalties that result from improperly filed tax returns. Even if you later get divorced, the IRS can still collect against you except in limited circumstances in which you qualify for innocent spouse relief. Filing separately leaves you off the hook for any mistakes you spouse makes.
- For spouses considering separation or divorce, filing separately is often consistent with the separation of their finances generally — even if it doesn’t always produce the lowest total tax due.
In addition, if your spouse already has liability in the form of unpaid taxes, loans or other obligations, filing separately can be the only way you can avoid having your refund confiscated by the IRS to pay those obligations. If you file jointly, then your entire refund can go toward paying down those obligations, even if the refund comes from your part of the tax equation rather than from your spouse.
Make the Best Choice Possible on Your Taxes
The safest way to be sure you make the right decision is to figure out your taxes both ways, and then choose whichever method costs you less in taxes (and reduces your individual liability). In the vast majority of cases, joint filing will be your better move.