Since I work with married couples, tax time brings up a critical question: Should we file jointly or separately?
First, some background: as a married couple, you must file either a Married Filing Jointly (MFJ) or Married Filing Separately (MFS). There’s one exception to this rule. If you’ve lived apart from a spouse for the last half of year and have a qualifying dependent, you can file as Head of Household. And for people who’ve gotten married or divorced during the year, keep in mind that, at least in the eyes of the IRS, whether you were married on the last day of the year determines your marital status for the entire year.
Most of you will have to decide whether to file MFJ or MFS — and for the majority of you, filing jointly will make the most sense. The MFS filing status limits a lot of deductions, credits and phase-out limitations, so using that filing status can cost you money.
For example, if you file MFS you can no longer take the adoption credit, child and dependent care tax credit or the American Opportunity and Lifetime Learning educational tax credits. For those of you thinking about contributing to a traditional or Roth IRA, your income limits are much lower as well.
However, the decision becomes a bit more nuanced for those with student loans, higher incomes and deductions, and/or those with tax problems. Today I’ll cover those considerations and explain why the decision may change from year-to-year.
Do You Have Student Loans?
I’ve already written quite a bit on the marriage penalty and the marriage bonus, so I won’t rehash everything now. Simply put, you may incur a bonus (i.e., lower tax liability) by combining two incomes or a penalty (i.e., higher tax liability) when combining your incomes. If you earn about the same amount as your spouse, you’re more likely to incur the penalty. If you earn a lot more or a lot less than your spouse, you may get the bonus.
Still, the total tax savings is only one piece to the puzzle. The way you file can also affect your student loan payments, especially if you’re on an income-driven repayment plan. If you’re employing a loan repayment plan like Income Contingent Repayment (ICR), Income Based Repayment (IBR and New IBR), Pay as You Earn (PAYE) or Revised Pay as You Earn (REPAYE), you may want to think twice about filing jointly.
That’s because all of these plans determine your monthly payment based on your prior year Adjusted Gross Income (AGI). Under ICR, IBR, PAYE and New IBR, married couples can either:
- File jointly and have monthly payments based on joint AGI and combined student debt, or
- File taxes separately and have monthly payments based on individual AGI and individual student debt.
With REPAYE, you’ll have to pay based on combined income, whether you’re filing MFJ or MFS.
You will have to determine which method saves you the most short-term (i.e., yearly expenditures on your student loans), as well as long-term with the interest and forgiveness savings. This benefit can change from year-to-year depending on income increases and job changes.
Do You Have a Lot of Itemized Deductions?
Filing separately may also allow you to maximize deductions, if you or your partner itemize. Again, you’ll get the most benefit out of this strategy if you and your spouse earn different very amounts, or have different deductible expenses.
This strategy works because the IRS limits some deductions on your AGI. For instance, medical deductions have to total more than 10% of your AGI to benefit you; the more you earn, the higher this threshold rises. Similarly, job expenses (i.e., unreimbursed employee expenses), tax preparation fees and investment expenses have to exceed 2% of your AGI to become deductible.
So if one spouse has significant deductions and lower income than the other, it can benefit a couple to file separately. That way the lower-earning spouse can take deductions based on his or her lower AGI.
For instance, if your combined AGI is $200,000 but Spouse 1 makes $150,000 and Spouse 2 makes $50,000 of that, together you would need over $20,000 in medical expenses to take a deduction. But filing separately Spouse 1 would need $15,000 and Spouse 2 would only need $5,000. If Spouse 2 has $15,000 in medical expenses, he would get a $10,000 bump in his available itemized deductions.
Keep in mind, though, that both spouses must either take the standard or itemized deduction. In other words, if Spouse 1 itemizes, so must Spouse 2, even if your file separately. You will have to look at total deductions and credits to see if itemizing would be better overall.
Do You or Your Spouse Have a Tax Problem?
Another good reason for filing separately comes into play when one spouse owes back taxes. For instance, let’s say your spouse is self-employed and owes for several back years because he or she didn’t pay estimated tax payments. The IRS may redirect any current joint refund to that debt. In this situation, it might be more advantageous to file separately so that the non-owing spouse gets a refund — even if the couple ends up paying more total tax.
You can solve this problem in another way, too. If you know that your spouse has a tax problem, but you still want to file a joint return, you can file form 8379 Injured Spouse Allocation with the return (or after if you realized too late) to have the non-liable spouse’s portion of the tax refund given back to him or her. This way you get the potential bonus of filing jointly and while still getting to keep some of your refund. You can even do this in community property states where each spouse is entitled to half of their spouse’s income.
Keep in mind that an injured spouse is different from an innocent spouse. Innocent spouse relief relieves a spouse from responsibility for paying tax, interest, and penalties, if his or her spouse (or former spouse) improperly reported items or omitted items on your tax return. This rule gets a bit sticky because of knowledge requirements, so I will leave the details on this for another post. I just want to point out that these are not the same thing and require different forms and procedures.
So MFJ or MFS? I hope I’ve helped you get started. Choosing can be tricky, so it’s probably best to consult a tax professional if your situation is complex. In addition, your circumstances can change from annually, so it’s something to consider every year before you file.
One last thing to note: if you want to change the filing status on a past return, you have three years from the return’s due date to amend it from MFS to MFJ. However, you can never amend from MFJ to MFS.
As always, let me know what you think. I would love to hear about any filing status issues you’ve run into. You can contact me with the links below.