In the United States and many other countries, governments provide tax benefits to those who get hitched. Married couples enjoy many tax breaks that individuals and those who file under another status do not get. Yet, some situations exist in which filing separately makes sense. Below we discuss the three filing status choices married couples have when filing their income taxes and advantages and disadvantages associated with them, as well as common scenarios that call for filing taxes separately when married.
Filing income taxes jointly is the norm for the vast majority of married couples because it provides the largest tax break. Joint filers typically receive the largest standard deduction from their income tax each year. Additionally, married couples who file jointly often qualify for multiple tax credits, each with a higher threshold than if they were to file separately. This allows qualification for certain tax breaks with a higher income. Some examples include the Earned Income Tax Credit, Child Tax Credit, Elderly and Disabled Credit, Child and Dependent Care Credit, and the American Opportunity and Lifetime Learning Education Tax Credits.
Benefits of Filing Jointly
A tremendous advantage of filing jointly is that you will be combining the deductions you take. This sometimes means itemization of deductions for those filing jointly makes greater sense than when filing separately. It especially makes sense for married couples who are purchasing their first home. Also, the home sale exclusion also doubles for married couples. Married couples can also give bigger gifts to other individuals without necessarily triggering as significant of a taxable event for those receiving the gifts. The annual gift exclusion for those filing separately is $15,000. For married couples filing jointly, it is $30,000. There are almost always significant tax complexities when it comes to filing returns.
There are a large number of deductions and write-offs that taxpayers do not take advantage of because they do not understand all of the laws. The tax planning services of experienced tax attorneys can for this reason be invaluable.
Issues That Married Couples Face When Filing Taxes
Married couples must either file jointly, or identify themselves as married but filing separately. You must choose which status to file on if the marriage took place by the last day of the tax year. It doesn’t matter if you were single for the majority of that year. The standard deduction for married while filing jointly is $24,000. Likewise, if marrying and filing separately, you can take a standard deduction of $12,000. What is the best choice will usually depend upon your individual circumstances. While it is generally beneficial to file jointly, it may make sense to file separately if one spouse has significant medical expenses. This is because thresholds for such deductions differ if you are filing jointly versus separately. (It’s important to note that thresholds may vary from year to year. Therefore, the decision whether to file jointly or separately may not be the same every year.)
Filing as Head of Household
In some cases, when couples file separately, one person can file as Head of Household (HOH). Like filing jointly, filing as HOH results in a greater standard deduction and lower tax rates than those who are married and filing separately. Qualifying as HOH also requires an exemption for a qualifying person, which is typically a child or parent dependent. As HOH, the person must pay more than 50 percent of the cost to support and house the qualifying dependent. Housing costs include rent or mortgage, monthly utilities, insurance, taxes, and other maintenance costs.
In most cases, filing income taxes separately when married does not have any tax benefits. Yet, some situations call for a Married, Filing Separately status. Below are some common scenarios when a married couple should file separately. Keep in mind that even though spouses file separate income tax returns, they both must choose to itemize deductions or claim the standard deduction. If you and your spouse choose to take the standard deduction, you will get the same amount as single filers. In 2020, the standard deduction is $12,200. If one of you qualifies for HOH, you can take a standard deduction of $18,650.
Massive Student Loan Debt
The Department of Education allows those who hold federal student loans to repay their loans based on the amount of income they make. The required monthly payment increases with income. Those who file separately can secure an income-based repayment plan based on their income without including their spouse’s income. Yet, this can still prevent a problem when the debt isn’t high. Those who file separately are ineligible to take student loan interest deductions, nor do they receive any of the education credits that joint filers receive.
Massive Medical Bills
As of 2019, the IRS allows taxpayers to deduct out-of-pocket medical expenses totaling more than 7.5 percent of adjusted gross income. The same rate applies to those who are married and filing jointly. If one partner has an excessive amount of medical expenses and you file jointly, the rate is figured on your joint income. This means the amount of your medical expenses must be much higher to qualify for the deduction. Filing separately allows the spouse with high medical bills to reach the 7.5 percent adjusted gross income threshold more quickly and take deductions to reduce their tax burden.
Headed Towards Separation or Divorce
Couples who know they are headed for divorce often choose to file separately to divide their tax liability. If you file jointly, you and your spouse are equally responsible for any taxes and penalties for the associated tax year. This does not change, even if you divorce later. Filing separately allows each partner to remain financially liable for their own return, ultimately keeping their finances separate during an impending separation.
Protect Expected Money From a Tax Refund
The Bureau of Fiscal Service’s Treasury Offset Program provides the authority for the government to seize tax refunds from those who owe back taxes, have delinquent student loans, owe back child support, or have another debt obligation. Filing jointly means the refund is shared, putting you on the hook for their debt. Newly married couples especially benefit from filing separately to protect their expected refund if one partner has any of the above debts.
In some cases, married couples might qualify for Innocent Spouse Relief from the IRS. A partner who requests Innocent Spouse Relief might not be on the hook for taxes, interest, and penalties if their spouse made an error on the tax return. The IRS defines errors that qualify as mistakes or omissions such as unreported income, incorrect deductions, incorrect credits, or an incorrect property basis. This program does not protect joint filers from student loans or debt related to child or family support. It’s a common myth that a partner must file separately to qualify for Innocent Spouse Relief, so it’s worth discussing with your tax attorney depending on your situation.
Lower Taxes When Incomes Don’t Match
In some marriages, one partner earns significantly more than the other. Filing jointly puts the couple in a much higher tax bracket and eliminates eligibility for some major deductions and credits. Filing separately sometimes allows for the spouse earning the lowest income to come out better financially. For example, let’s say one partner earns $750,000 annually and the other earns $75,000. The low-income partner not only has a lower tax bracket but can potentially cash in on other tax advantages.
Contact Silver Tax Group to Learn Whether You Should File Taxes as Married, Filing Separately
The skilled tax attorneys at Silver Tax Group have extensive experiences helping married couples reduce their tax burden and get as many credits and deductions as possible. If you have questions about whether to file jointly, as head of household, or separately, contact us today for a free consultation with one of our experienced tax professionals.