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Back to Tax 101
There are a number of decisions you’ll have to make as a married couple. What color are you going to paint the house? When’s the best time to have children? How many children are you going to have? Should you file your taxes jointly or separately?
All right, so that’s probably not one of the more pressing matters on the mind of a newlywed couple. But it’s an important question for married couples to ponder, so much as finances go.
Most couples file their return jointly, merging both combined incomes and shared deductions. Tax law changes have eased the marriage penalty, encouraging the trend to file jointly. This “marriage penalty” tended to show up when working spouses made roughly comparable incomes. In many cases, filing jointly would result in a greater amount owed on their combined return as opposed to filing as a single taxpayer, forcing the couple to pay an additional fee thought of as a penalty.
A clear picture of both your finances will allow you to properly assess the situation and decide when filing separately or jointly is best.
Married + Filing Taxes: Filing-Status Essentials
You’ll have to select your filing status when you file your annual tax return. The IRS has five filing statuses:
- Single
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er)
Married couples will file their taxes as either married filing jointly or married filing separately.
Why does your tax filing status matter? Because your filing status will generally affect how much of your income is taxable. If you’re trying to maximize your tax savings (an admirable financial goal for any couple), then you and your spouse should determine which filing status would be best for the two of you.
Filing Separately
There are definitely circumstances in which filing separately is warranted.
When to File Separately
Here are a few scenarios in which it might be best for couples to file separately:
- One spouse has a low income and lots of deductible expenses
- When each spouse wants to maintain control of his or her personal income
- When filing jointly doesn’t grant a significantly better tax break than filing separately
- When one spouse has questionable financial behavior
- When a marriage is ending
Separate tax returns can produce savings if one spouse has a lot of medical expenses and a low income. By filing separately, the partner with the medical bills may be able to exceed the 10% of adjusted gross income threshold needed to itemize medical costs. Taxpayers 65 years or older may still use the 7.5% requirement for their tax filing, but the 10% threshold applies to everyone in 2020. When filing jointly, only one person needs to satisfy the age requirement to receive a lower deduction percentage.
Couples sometimes elect to file separately when the taxes due on combined returns are comparable to taxes owed when filing on their own. Filing separately allows each spouse to maintain responsibility for the accuracy of their own individual tax returns and the payment of tax without any additional liability.
It is encouraged to file separately when your spouse practices questionable tax filing strategies. If it comes down to it, there is legal protection in place for spouses who are unaware of illicit activity, however, that spouse needs to have proof that they were truly not cognizant of any tax scheme.
It is also advised to file separately when a marriage is breaking down to avoid the hassle of sorting out tax costs later on.
Potential Consequences of Filing Separately
Unfortunately, most couples will generally owe a higher amount of tax at a higher tax rate when they file separately. The standard deductions is lower for couples who file separately than for couples who file jointly. In 2020, the standard deduction is:
- Married filing jointly: $24,800
- Married filing separately: $12,400
Furthermore, couples filing separately
- Are disqualified from many tax deductions and credits
- Cannot deduct student loan interest
- Are limited to a $1,500 capital loss deduction (as opposed to $3,000 for couples filing jointly)
For most couples, it’s more financially advantageous to file jointly.
Eligibility Requirements for Married Filing Separately
To file separately, you and your spouse must have been married by December 31 of the tax year for which you’re filing. Even if you were married on December 31, you can still choose the married filing separately status for the whole tax year.
There are a few life events that may enable you to change your filing status:
- If you legally separate from, or divorce your spouse during the tax year, you could start using the single or head of household filing status
- If your spouse passes away, you may use either the married filing jointly or filing separately status for the tax year in which your spouse died–after that, you may be able to file as a qualified widow(er) status if you’re eligible
Married Filing Separately with Kids
When you and your spouse file separately, only one parent can claim dependents. Typically, the parent that provides housing for the child during most of the tax year gets to claim the dependents and receive a tax break. If the dependents lived with both parents equally, then only the parent with the highest adjusted gross income can claim the child.
Filing Jointly
As a married couple, filing jointly is of course the more common choice. This route qualifies you for a number of tax breaks, including:
- The earned income tax credit
- Student loan interest deductions
- Deductions for college tuition
- Child and Dependent Care Tax Credit
- Traditional IRA deductions
Joint filers usually receive higher income thresholds for taxes and deductions, which means they can still qualify for certain tax breaks even when they’re making a larger amount of money.
When to File Jointly
Filing jointly is particularly advantageous when one spouse makes more than the other. Combining incomes can bring the spouse with the higher level of income into a lower tax bracket.
File Jointly or Separately? How to Choose
One of the best ways to determine whether you should file your return jointly or separately is to prepare your tax return both ways. Prepare your return as if you were filing jointly, and then do it as if you were filing separately. Be sure to double check your calculations, and compare each return when you’re finished. It’s safe to suggest that you should probably choose the filing status that offers you the best tax savings. This can be a tedious process, but it’s the best way to determine which will be the most lucrative filing status for you. Remember: once you’ve filed your tax return as “married filing jointly,” you can’t amend it to file separately. You’re stuck with whichever filing status you choose.
Need some help? Contact a tax professional today for advice on choosing your filing status, and for other tax concerns
