Question

Laura Lee and William are married. If they file married filing separately, they will together owe more taxes than if they file married filing jointly. They decided to file separately. Why did they most likely decide to file separately even though it will cost them more money?

Answer 1

A couple may pay the IRS less by filing separately when both spouses work and earn about the same amount.

When they compare the tax due amount under both joint and separate filing statuses, they may discover that combining their earnings puts them into a higher tax bracket.

Their savings depends on a variety of other factors, however, including their investment situation and whether they have children.

The "married filing separately" status cuts the deductions for IRA contributions and eliminates child tax credits, among other tax breaks.

Using miscellaneous deductions by filing separately (for tax years prior to 2018)

Miscellaneous deductions can lower taxable income, but in order to enter them on Schedule A, they must add up to more than 2% of adjusted gross income (AGI).

Spouses with union dues, job-search costs, tax-preparation fees and un-reimbursed business expenses may find their miscellaneous deductions don't qualify when their higher combined income raises their AGI.

A spouse who travel frequently for business could rack up a sizable tally in airline fees for baggage and itinerary changes that makes the miscellaneous deduction worth pursuing.

Beginning in 2018, these types of miscellaneous expenses are no longer deductible.

Filing separately to save with unforeseen expenses

Adjusted gross income also determines if a couple can use un-reimbursed health care costs and casualty losses on Schedule A to save taxes.

Unless out-of-pocket medical expenses exceed 10% of AGI for 2019 (7..5% of AGI for 2017 and 2018), they don't qualify as a deduction.

Casualty losses must also total more than 10% of AGI.

The spouse with the loss or substantial medical outlay calculates deductibility against his or her own lower AGI when the couple files separate returns. When one spouse can lower taxable income this way, married filing separately might trim a couple's overall tax burden.

Filing separately to guard the future

When you don't want to be liable for your partner's tax bill, choosing the married-filing-separately status offers financial protection: the IRS won't apply your refund to your spouse's balance due. Separate returns make sense to prevent the IRS from seizing a spouse's tax refund when the other has fallen behind on child support payments.

Couples in the process of divorcing may shun joint returns to avoid post-divorce complications with the IRS, while a spouse who questions her partner's tax ethics may feel more comfortable living a separate tax life.

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There are cases when people save tax by filing separately. For example:

One spouse has significant medical expenses. For 2019 and 2020, medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in larger total deductions.

Some tax breaks are only available on a joint return. The child and dependent care credit, adoption expense credit, American Opportunity tax credit and Lifetime Learning credit are only available to married couples on joint returns. And you can’t take the credit for the elderly or the disabled if you file separately unless you and your spouse lived apart for the entire year. You also may not be able to deduct IRA contributions if you or your spouse were covered by an employer retirement plan and you file separate returns. You also can’t exclude adoption assistance payments or interest income from series EE or Series I savings bonds used for higher education expenses.

Social Security benefits may be taxed more. Benefits are tax-free if your “provisional income” (AGI with certain modifications plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return, but zero on separate return (or $25,000 if the spouses didn’t live together for the whole year).

No hard and fast rules

The decision you make on your federal tax return may affect your state or local income tax bill, so the total tax impact should be compared. There’s often no simple answer to whether a couple should file separate returns. A number of factors must be examined. We can look at your tax bill jointly and separately. Contact us to prepare your return or if you have any questions.

****Reference: IRS ebooks, Betterment's articles,