A few readers have recently asked about the advantages and disadvantages of filing Married Filing Jointly (MFJ) and Married Filing Separately (MFS). This distinction has become especially important for all of those newly married couples out there – including me and Ben! – that must pick one or the other for the first time. So today I’m going to discuss the benefits and detriments of both filing statuses.
The Marriage Penalty
Before I get to the statuses, I should first mention the “marriage penalty.” This phenomenon occurs when a couple that files jointly pays more tax than they would if they filed individually. This usually happens when the spouses have similar incomes, and their combined income pushes them into a higher marginal tax bracket. For more some actual numbers on how this works, check about my previous post on the topic.
General Rule – File Jointly
In most cases, you will get a bigger benefit from filing MFJ rather than MFS. Congress has written the tax code in such a way that it favors the MFJ status and limits some adjustments, credits, and deductions when you choose to file MFS. Some of the credits and deductions that are completely eliminated when filing MFS include:
- The student loan interest deduction
- The American Opportunity Credit and Lifetime Learning Credit for higher education expenses
- The deduction for college tuition expenses
- The Earned Income Credit
- The adoption credit
- Tax-free exclusion of Social Security benefits
- The credit for the elderly and disabled
You can get around the MFS limitations in some situations if you didn’t live with your spouse the entire year or the last six months of the year and have a dependent. In addition, some deductions like the ones for net capital losses and traditional IRA contributions don’t eliminate the benefit entirely but severely reduce it.
Either way, filing MFS can really hinder your ability to take advantage of thee benefits.
Where Filing Separately May Help
There are certain circumstances where you would be better off filing MFS, rather than a joint return.
- Keeping Liabilities Separate. When you file a joint return, both spouses are Jointly and Severally liable for the debt, meaning the IRS can collect from either and/or both of you. Many of my clients have liabilities for multiple years, so often a new spouse doesn’t want anything to do with the past situation or future repercussions like losing refunds to the prior debt. And while a new spouse will not be liable for prior debts, being married and incurring a new joint liability will affect how the IRS considers resolution options on a case.
- Lowering your AGI: You may also get a boost to filing individually if one person takes significant itemized deductions that are limited by the Adjusted Gross Income (AGI). For example, medical expenses are limited to 10% of AGI (7.5% for those 65 and older). Thus the higher your AGI, the less of a deduction you get. Filing the income separately will keep the AGI lower and thus allow you to take more of your deduction. However, keep in mind, that if one spouse itemizes that other must as well.
- To Simplify Filing: Lastly, for those same sex couples that have married in a state that recognizes same-sex marriages but live in a state that doesn’t, filing MFS may simplify the state return filing process. If you were to file an MFJ federal return, you would then have to file a mock joint state return, plus an two additional single returns to separate the income and deductions for the state. Keeping the returns separate from the beginning might simplify the splitting process. Hopefully full marriage equality comes soon and there won’t be these unneeded layers of complexity.
As you can see, a lot of factors will influence whether it will be economically beneficial to file jointly or separately. So as I’ve suggested before, seeing a tax professional can help you sort out how MFJ and MFS can affect your specific situation.
On the other hand, saving money on taxes may not be your main motivation for filing jointly. Even though Ben and I incur a marriage penalty, the significance of filing a joint return outweighs the savings we miss.