This is a guest post by 20SomethingFinance reader Natalie H. Natalie is a tax preparer who loves tax strategy. She has previously posted an overview of 7 IRS audit red flags to watch out for.
Married Filing Separately? Does it Make Sense for my Spouse and I?
Should we be filing Married Filing Separately (MFS) or Married Filing Jointly (MFJ)? This is a tricky question to answer.
There are many reasons that people wish to file MFS. However, tax laws don’t make it easy on you.
Right from the get go, filing as married filing separately is particularly troublesome in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) where income must be equally split between spouses.
There are also numerous penalties associated with choosing married filing separately.
- The overall tax rate will be higher.
- You cannot take several credits including: Earned Income Tax Credit, Adoption Credit, Credit for Child and Dependent care in most cases, or any education tax credits and deductions.
- The Saver’s Credit and Child Tax Credit are reduced by half.
- Your capital loss deduction limit is $1,500 (instead of $3,000 on a joint return).
- You and your spouse must either both itemize or take the standard deduction.
So with all these penalties, why would someone choose to file as MFS? Here are some reasons my clients have given:
- I no longer live with my spouse and I don’t want to file taxes together.
- My spouse owes back taxes, child support, or has other liens that would prevent us from receiving a refund.
- My spouse wants to itemize taxes and I don’t.
Let’s analyze each separately:
#1: “I no longer live with my spouse and I don’t want to file taxes together.”
In this case I advise my clients with children that they may be able to use something called the “abandoned spouse rule” to claim head of household. To qualify for head of household while married, you must have a dependent child living in the household and the spouse must not have lived at that residence any time during the last six months of the year. Please read publication 501 for additional criteria and information about this use of HOH.
For those that don’t have children and live in a community property state, I don’t advise filing separately. This is because income must be split equally. How do both people claim half a W-2? Well, the IRS tells us to do it, but doesn’t say how. It can’t be filed electronically, so it must be a paper form, which encourages errors. The IRS will likely not compute your tax correctly leading to a personal review. You should probably send a letter of explanation. Is it really worth the extra attention?
If you don’t have children and don’t live in a community property state, you are free to file separately, but you will almost certainly be taxed more. Depending on your personal situation, it may be worth the extra tax to keep things separate.
#2: “My spouse owes back taxes, child support, or has other liens that would prevent us from receiving a refund.”
In most states, this may be a reason to file separately, but beware of all the extra rules for MFS, listed above. Consider that by filing jointly you will almost certainly get a larger refund, and although this will be applied to the debt, you will also be able to eliminate the debt much more quickly.
In community property states, you should file together, but also file form 8379, the injured spouse form. Since only half of the refund is allocated to each individual, you will normally get half of the expected refund. This form may also work for non community property states, but is less likely to be accepted or may be weighted by income.
#3: “My spouse wants to itemize and I don’t.”
One of the penalties of MFS is that either both itemize or neither does. This must be true even if the itemized deductions for one person equal zero. However, there may be some circumstances where this is still an advantage. There are some deductions which are income based, such as medical expenses and non reimbursed employee expenses. If only one spouse incurred these deductions and you would otherwise not be able to claim these deductions, it makes sense to calculate your return both ways and choose the most advantageous. Again, if you live in a community property state, dividing income equally can be problematic.
To summarize, the IRS heavily penalizes those who file separately, but there are still some rare cases where you can benefit monetarily by filing separately. Most couples would do better to settle their differences for one day and file taxes together.
Additional Notes from Natalie: I work as a tax preparer in a community property state. In four years of practice, I have never had a client who benefited from choosing Married Filing Single.
This article is meant to illustrate my personal experience. It is not tax advice. If you have any questions, please consult the IRS publications and your personal tax advisor.
Additional Note from G.E.: Married filing separately would also require you to file multiple federal and state returns. Even if you’re using the cheapest tax software, this could result in additional tax preparation expenses.
Married Filing Separately Discussion:
- Have you file married filing separately? For what reasons? What were the tax savings?
- Do you have any additional tax tips on married filing separately?