Despite the fact that you’re married, it doesn’t necessarily mean you’ll file your taxes as married filing jointly. There is another status available to you: married filing separately.
Married filing separately status has a variety of appealing financial benefits that could save you money. Even if you don’t go down this path, compare the pros and cons to married filing jointly, as this will give you a clear idea of which one best suits your financial circumstances.
What is Married Filing Jointly?
This is exactly what it sounds like: you’re a married couple, but you decide to file individual tax returns as opposed to a joint return.
Even though the IRS encourages people to file jointly - especially with the Tax Cuts and Jobs Act of 2017 creating more incentive - there are still scenarios in which it makes more sense to file separate returns.
Note: you must be considered legally married on December 31 of the tax year to have the option to designate married filing separately status. This is an important detail in the event that you’re going through a divorce.
When to Choose Married Filing Separately Status
As noted above, you should choose a filing status based on your personal situation for the tax year in question. If you’re thinking about filing separately, here are some of the reasons why it may make sense:
1. Itemized Deductions Limited by Adjusted Gross Income
When you file your tax return, you will choose between the standard deduction and itemizing your deductions, which allows you to list out every deductible expense.
For the 2020 tax year, the standard deduction looks like this (courtesy of NerdWallet).
If you only take those numbers into consideration, it’s simple to see that married filing jointly is the way to go.
However, if you and/or your spouse both have taxable income and one or both of you have itemized deductions limited by adjusted gross income, don’t rush to file jointly. There may be tax advantages of filing separately.
Note: if one spouse itemizes deductions, the other is required to do the same.
2. Separate Tax Liability
You probably don’t think twice when signing a joint tax return, but here’s what it means: you’re both responsible for the accuracy of the return, as well as any tax liability associated with it.
Conversely, if you file separately, you’re only responsible for the liability associated with your return.
If you have reason to believe your spouse is filing an accurate return, such as by hiding income or falsely claiming credits and/or deductions, you can eliminate your liability by filing separately.
Also, if you’re considering divorce, filing separately allows you to keep your finances separate, at least on this front.
3. Unique Personal and Financial Circumstances
No two couples take the same approach to their personal life and financial circumstances.
For example, you may be married, however, you don’t live in the same house (or maybe even the same state). Or maybe you’re married but keep your finances 100 percent separate.
If you have unique personal and/or financial circumstances, consider the benefits of electing for married filing separately status.
This goes along with point #2 above. An example would be someone who wants to keep their finances separate because they don’t agree with the way their spouse manages their money and tax obligations.
4. Part of an Income-Based Repayment Plan for Student Loans
Are you and/or your spouse eligible for or already part of an income-based repayment plan for student loans?
If so, filing separately may allow you to make a smaller monthly payment, thus freeing up money for other expenses.
Keep in mind that there are potential drawbacks. For example, it’ll take longer to repay your loans. Also, if your debt is forgiven for any reason in the future, it’s likely to have a more serious impact on your next tax return.
The Main Disadvantage of Filing Separately
Now that you understand some of the biggest benefits of filing separately, let’s turn our attention to some of the potential drawbacks.
At the top of the list is the many tax breaks that you don’t qualify for when filing separate returns. These include but are not limited to:
- Child and Dependent Care Credit
- American Opportunity Tax Credit (AOTC)
- Lifetime Learning Credit
- Traditional IRA deductions
- Roth IRA contributions
- Student loan interest deduction
- Tax-free exclusion of Social Security benefits
Credit Karma does a good job breaking down the above (among other tax breaks) into three categories.
This is why it’s so important to compare the pros and cons as they suit your financial situation.
If you qualify for a handful of the tax breaks above, it could make more sense to file a joint return. But if you don’t qualify for any, you have one more reason to consider filing separate returns.
Review Your Income Tax Bracket
The amount of taxes you pay is based on your income. Income tax brackets change based on the filing status you choose.
Check this out. This is the tax bracket for 2020 (for taxes due April 15, 2021). When married filing jointly, you’re only taxed 10 percent on your first $19,750 of taxable income. However, when you file separately, that number drops precipitously to $9,875.
As your income increases, the discrepancy becomes even more obvious. For example, the 24 percent tax rate for married filing jointly is between $171,051 to $326,600. But if you file separately, it drops to $85,526 to $163,300.
Knowing how much income you and your spouse earned during the tax year is critical to deciding for or against filing separate returns.
As a married couple, it’s more common to file a joint tax return than two separate returns. But when it comes to your money, you shouldn’t make any decision until you’re 100 percent confident that it’s the right one.
With this guide to filing taxes married but separately, you have the knowledge needed to decide if this is the right choice for you, your spouse, and your finances as a whole.