Most married couples assume they should file joint income tax returns. In most cases, that's the correct choice. But under certain circumstances, there may be benefits to filing separate returns.
Bear in mind that the differences between married filing jointly and married filing separately (MFS) can be complicated. Switching from one status to the other may increase some tax breaks while reducing others. (Some tax breaks are only available on a joint return.) So, it's important to analyze the numbers before determining which status is best for you.
With that in mind, here are some situations in which it may be advantageous to file separately rather than jointly.
Unreimbursed medical expenses are deductible as an itemized deduction to the extent they exceed 7.5% of adjusted gross income (AGI). If one spouse has significant unreimbursed medical expenses and relatively low income, filing separately may result in a substantially larger medical expense deduction.
Note that when filing separately, both spouses must itemize, or both must claim the standard deduction. So, this strategy only works if the spouses' combined deductions are greater than the standard deduction for joint filers.
Eligible business owners are entitled to deduct up to 20% of their qualified business income (QBI) from sole proprietorships or pass-through entities (partnerships, limited liability companies and S corporations). For certain types of businesses (including "specified service businesses"), the QBI deduction is phased out for owners whose taxable income exceeds certain thresholds. If the couple files jointly, the QBI deduction could be lost if their income is over the threshold. But if they file separately, one spouse may be entitled to the full 20% deduction if his or her income is below the threshold for MFS filers.
With income-driven plans, the borrower pays a certain percentage of income for a specified term after which the remaining student loan balance may be forgiven. For married borrowers, some of these plans will base loan payments on the borrower's individual income if the spouses file separate returns.
Under the right circumstances, filing separate returns can generate significant tax savings for married couples. To determine whether this is the right strategy for you, consider the overall impact of MFS status on your combined tax liability.
Filing separately may save taxes in one area, but it may cost you in others. For example, separate filers can't claim certain education credits, child and dependent care credits, or student loan interest deductions. Ask your tax advisor to calculate your tax liability for both joint and separate returns to see which approach produces the best outcome.
In general, you should choose the filing status that results in the lowest tax. But keep in mind that, if you and your spouse file a joint return, each of you is "jointly and severally" liable for the tax on your combined income. And you're both equally liable for any additional tax the IRS assesses, plus interest and most penalties. That means the IRS can come after either of you to collect the full amount.
Although there are "innocent spouse" provisions in the law that may offer relief, they have limitations. Therefore, even if a joint return results in less tax, some people may still choose to file separately if they want to only be responsible for their own tax. This might occur when a couple is separated or when one spouse owns a business and the other is worried that all tax rules aren't being followed.
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