You likely were invited to one United States wedding or another this summer (or perhaps YOU were doing the inviting?) … ’tis the season. If you were the one saying vows, many congrats!
Weddings are the fun part. The part of that whole “two become one” reality that’s not as fun is navigating the tax ramifications. Whether that’s you or someone you know, it’s worth knowing and sharing…
Just like couples decide whether they’ll have separate or joint checking accounts, you’ll also need to decide whether to file jointly or separately. And while most choose the former, I’d like to take a moment to focus on when married filing separately makes sense.
Before I jump into that, though…
Taxes are about to get even wilder and woolier in 2023.
The newly minted Inflation Reduction Act means more funding for the IRS – and while the funding increases the IRS’s enforcement capacity, not everyone has confidence this is actually helpful to the agency’s many shortcomings. It also means an increased potential for more audits from top to bottom.
Also, the digital payment app 1099s come into play this filing season, which means people who haven’t been reporting those side hustle earnings appropriately will be scrambling to make sure they’re in compliance.
And, of course, a lame duck Congress threatens to bring new potential chaos to tax situations.
It all boils down to this: BE PREPARED.
And we know you can do that on your own, but it also doesn’t hurt to have some help on that front… and that’s why my office is here:
Now – let’s examine married tax filing status, and how filing separately might be an advantage for some United States couples…
When Married Filing Separately Makes Sense for United States Couples
“Sometimes good things fall apart so better things can fall together.” – Marilyn Monroe
If you’re like many couples, one of the first boxes you check for your filing status when starting the headache of your tax return every year is “Married Filing Jointly.” And why not?
You two are married, aren’t you? Doesn’t it make sense to mingle your finances when telling the IRS about your taxes?
Not always. There’s another tax-filing status that blissfully wedded taxpayers don’t think about often: Married Filing Separately, or MFS.
Though the term makes it sound like you’re throwing plates at each other and digging out the suitcases, MFS (often) doesn’t say as much about your emotions as it does your money situation.
Those three little letters
You can choose different statuses when you file your federal taxes: Single, Head of Household, Married Filing Jointly (MFJ), and Married Filing Separately. Each has various tax benefits and disadvantages, and you pick the one that best fits your life situation. MFJ and MFS are the only two you really get to choose between.
MFS is how, as you might guess, two persons married to each other file separate tax returns, each reporting only their own income, deductions, and credits on their individual return. Each spouse is responsible only for the tax due on their own return.
If you and your spouse file MFS, neither of you can be on the hook for any tax liability of your spouse or errors on their return.
You can love someone to death and still realize that they’re hopeless when it comes to math or that their tax or debt history is a train wreck. Why not always use MFS?
It’s not quite that simple. (Nothing ever is in the tax world.) MFS comes with tax drawbacks. Potentially big ones.
The downside of married filing separately
One of the biggest goodies you get from the IRS at tax time is the standard deduction – you take this “standard” amount instead of itemizing, usually saving time and money. If filing MFS, you and your spouse must both decide to itemize or take the standard deduction. (The MFS standard deduction is exactly half the standard deduction for MFJ, so there’s no loss there at least.)
The IRS also makes it harder to claim (or just flat-out nixes) a lot of tax benefits for those who file MFS. Among affected deductions or credits are retirement plan contributions, interest on student loans, education credits, and adoption credits. Regarding your darling little dependents, generally, the parent with custody of a child can claim that child on their tax return. If parents split custody evenly and file MFS, you two have to figure out which of you gets to claim the child.
You might also pay more in taxes, as generally, couples filing MFJ can make a little more money before they’re kicked into a higher tax bracket. MFS can also increase your Medicare premiums.
You can always check with us on additional tax restrictions and work that this filing status ignites (including in a community property state).
A look at the plus-side
Medical expenses. If one of you makes a lot more money than the other and the spouse who makes less has big outlays for medical bills, MFS might well get you a better tax deal. You can deduct that part of your total medical expenses that exceed 7.5% of your adjusted gross income – and if you file separately, those bills could add up to a significant tax break if offsetting only the income of the one who earns less.
Past debt. The IRS often taps tax refunds for money owed for back taxes, child support, or other debts (check with us on this). If one of you owes such debts and you expect your combined (MFJ) tax refund could get a haircut, filing separately could preserve the refund for one of you.
Capital gains. If one of you earns all the capital gains and dividends, MFS could lower the tax rate on that income. This depends on other factors, too, such as income. Check with us.
Protection. Let’s face it: Divorce happens, and often you can see it coming. Filing MFS insulates one taxpayer’s filing history and finances. As we mentioned, you’re not on the hook for your soon-to-be ex’s honest mistakes (or dishonest lies) on a past tax return. Something to consider even during an emotional storm.
You two can only amend your submitted tax return from MFJ to MFS prior to the original filing deadline (with no extension of time to file). And as often happens in relationships, try to look forward and not back.
Deciding which option is better – married filing jointly or married filing separately — isn’t something you have to do on your own, either. We can look at your situation and offer direction on this for you.
Or if you just want to figure out how to reduce your tax burden before 2022 ends, let’s sit down and look things over:
You’ve got a friend in the tax business.
We’re here for you,