When it comes to filing taxes, married couples have a critical decision to make – to file jointly or separately. While the majority of couples opt for the former, there are instances where filing separately might be the more advantageous choice. The concept of married filing separately is a tax status that allows spouses to record their respective incomes, exemptions, and deductions on separate tax returns. It's essential to understand that filing separately comes with significant drawbacks and limitations. Married couples must carefully evaluate their unique circumstances, weighing the pros and cons, to determine whether this filing status aligns with their interests.  This comprehensive guide will help you understand  how filing separately works, the disadvantages, special circumstances and how to take the decision to file taxes separately as a married couple. 

How Married Filing Separately Works

When married couples file separate tax returns, they are electing to use the "married filing separately" tax filing status. This means each spouse reports only their own income, deductions, and credits on an individual tax return.

The Internal Revenue Service (IRS) views married filing separately as its own distinct filing status, separate from single filers or those married filing jointly. Couples must have been married by the last day of the tax year in order to use this filing status. For instance, if the person is filing for 2022 as married he must be  married no later than Dec. 31, 2022. 

There are special rules couples must follow when married filing separately. Even though they are filing individually, they are still required to report their spouse's name and Social Security number on their separate return. If one spouse itemizes deductions, the other must also itemize and cannot take the standard deduction.

It's important to note that filing separate returns does not allow spouses to simply divide all tax credits and deductions in half. Many significant credits and deductions are unavailable or severely limited to married filing separate filers compared to joint filers.

While the reasons vary, many married couples do still elect to file separately each year for financial or personal considerations. Calculating their potential tax liability under both filing scenarios is advisable to determine the most beneficial approach.

What are Reasons to File Separately?

Divorce or Separation- One of the primary reasons for married couples to file separately is divorce or separation. Legal separations were the original motivation behind the creation of the married filing separately status. Divorcing or separated couples may not be willing, or able, to file their taxes jointly for various reasons. In such cases, filing separately becomes a necessity. However, it's important to note that only one individual can claim a dependent child, which is a crucial consideration when navigating this process.

Liability Issues- Filing separately may also be appropriate if one spouse suspects the other of tax evasion or if one spouse refuses to file a tax return altogether. In these situations, the innocent spouse can file separately to avoid potential tax liability due to the other spouse's behavior. By filing separately, each spouse is responsible only for the accuracy of their own tax return and any resulting liabilities or penalties.

Student Loan Repayment- Couples may also benefit from filing separately if one or both spouses are making student loan repayments. By filing a separate return, a spouse can exclude their partner's income, potentially qualifying them for a lower monthly payment on an income-driven repayment plan. This strategy can provide substantial financial relief for those struggling with significant student loan debt.

Diverse Pay or Deduction Scales- Even in the happiest of marriages, filing separately may be the more advantageous option, particularly when there is a considerable disparity in the spouses' incomes and one spouse has substantial potential itemized deductions. Consider a scenario where one spouse is a high-earning doctor with an annual income of $200,000, while the other is a teacher earning $45,000. If the teacher incurred significant unreimbursed medical expenses during the year, filing separately could allow them to deduct a portion of those expenses, which might not be possible if the couple filed jointly due to the higher combined income threshold.

Major Drawbacks of Filing Taxes Separately for Married Couples

While filing taxes separately can provide benefits in certain situations, it also comes with significant drawbacks that married couples should carefully consider. These include: 

Loss of Valuable Tax Credits

Couples who file separate returns are ineligible for many major tax credits that can significantly reduce their overall tax liability. These include:

Child Tax Credit- The Child Tax Credit is a valuable credit for families with qualifying children. For the 2023 tax year, the maximum credit amount for joint filers is $2,000 per qualifying child. However, when filing separately, each spouse can only claim half of this amount, which is $1,000 per qualifying child.

Child and Dependent Care Credit- The Child and Dependent Care Credit is a non-refundable tax credit that helps offset the costs of child or dependent care expenses incurred to enable parents to work or look for work. For the 2023 tax year, the maximum credit rate for joint filers is 35% of qualifying expenses up to $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. While couples filing separately may still be eligible for a partial credit if they are living separately, the full credit is only available to joint filers.

Education Tax Credits- Couples who file separately are ineligible for education tax credits such as the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC provides a maximum annual credit of $2,500 per eligible student for qualified education expenses during the first four years of post-secondary education. The Lifetime Learning Credit offers a maximum annual credit of $2,000 per tax return for qualified tuition and related expenses.

Adoption Credit- The Adoption Credit is a non-refundable tax credit that helps offset the qualified expenses related to the adoption of a child. For the 2023 tax year, the maximum credit allowed for adoptions is the total amount of qualified adoption expenses up to $15,950. This credit is only available to couples who file jointly, making it inaccessible for those who file separately.

Traditional IRA Deduction Limits

Contributions to a traditional Individual Retirement Account (IRA) may be tax-deductible, depending on the filer's income level and whether they or their spouse are covered by an employer-sponsored retirement plan. For the 2023 tax year, the deduction phase-out range for couples filing jointly is $116,000 to $136,000 (if the spouse making the IRA contribution is covered by a workplace retirement plan). However, when filing separately, the phase-out range is significantly lower, ranging from $0 to $10,000 (if the spouse is covered by a workplace retirement plan).

Deduction Limitations for Separate Filers

In addition to the loss of valuable tax credits, married couples who file separately face limitations when it comes to deductions. One significant limitation is that both spouses must choose the same method of recording deductions, whether itemizing or taking the standard deduction.

Itemized vs. Standard Deduction

If one spouse decides to itemize deductions, the other spouse must also itemize, even if their itemized deductions are lower than the standard deduction amount. For the 2023 tax year, the standard deduction for married individuals filing separately is $13,850, while the standard deduction for married couples filing jointly is $27,700.

When Does Filing Separately Makes Sense- The benefits

While filing jointly is often more advantageous for married couples, there are several situations where filing separate tax returns may be the better strategy. One major benefit is when there is a significant disparity in the spouses' incomes. If one spouse earns a high income, but the other has substantial deductions like large medical expenses, filing separately can allow the lower-earning spouse to claim those deductions without being subject to limitations based on the higher combined income.

For example, consider a married couple  approaching a tax preparer in brooklyn where one spouse is a doctor earning $250,000, and the other is a teacher earning $50,000 with $15,000 in medical expenses. Filing jointly could make the medical expenses non-deductible due to the 7.5% of AGI threshold. But if they file separately, the teacher could potentially deduct the full $15,000.

Filing separately can also provide advantages related to divorce or separation, shielding one spouse from tax liability issues caused by the other. It can allow student loan borrowers to potentially qualify for lower income-driven repayment plans by excluding their spouse's income.

While pros exist, separate filers also miss out on many valuable credits and deductions only available to joint filers. Careful tax planning is required to determine if this filing status provides an overall net benefit based on each couple's unique financial circumstances.

Special Considerations for Married Filing Separately

While the decision to file separately or jointly is primarily driven by potential tax implications, there are several special considerations that married couples should be aware of when opting for the separate filing status.

Community Property States- For couples residing in community property states, the rules regarding separate incomes can be complex. These states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In community property states, most income earned by either spouse during the marriage is considered jointly owned. As a result, couples living in these states may need to seek professional guidance from a tax expert to navigate the nuances effectively. A tax professional can ensure that the couple is adhering to the specific regulations and filing requirements for their state when filing separate returns.

Earned Income Tax Credit (EITC)- The Earned Income Tax Credit (EITC) is a valuable tax credit for low-to-moderate-income earners, designed to supplement wages and reduce tax burdens. While the EITC is generally not available to married couples filing separately, there are exceptions. Couples may still qualify for the EITC if they meet certain criteria, such as living apart for at least six months of the year, having a written separation agreement, or having a qualifying child who lived with them for more than half the year. It's essential to review the specific EITC eligibility requirements for separate filers to determine if they qualify.

Claiming Dependents and Splitting Deductions- When filing separately, only one spouse can claim a dependent child as a deduction. The IRS has tiebreaker rules that determine which spouse can claim the dependent if they cannot agree on who should do so. Additionally, couples can split their itemized deductions if the payment for the expenses was made from money owned by both spouses, typically from a joint bank account. However, the asset receiving the payment, such as a home's mortgage, must generally be owned jointly as well.

How to Decide: Filing Jointly vs Separately

Determining whether to file jointly or separately can be a complex decision, and there is no one-size-fits-all solution. To make an informed choice, couples should consider the following steps:

Calculate Tax Liability Both Ways- The most straightforward approach is to calculate the tax liability for both filing statuses – jointly and separately. By doing so, couples can compare the two outcomes and identify which option results in a lower tax bill or a larger refund.

Consider Income Levels and Deductions- When evaluating the filing options, it's essential to consider the respective income levels and potential deductions of each spouse. If there is a significant disparity in income and one spouse has substantial itemized deductions, filing separately may be more beneficial.

Community Property States- For couples living in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), the rules regarding separate incomes can be intricate. In such cases, it's advisable to seek professional guidance from a tax expert to navigate the complexities effectively.

How to File Separately

If a couple decides to file separately, they should follow these steps:

#1 Gather Required Documents- As with any tax filing process, it's crucial to gather all necessary documents, including W-2 forms, 1099 forms, records of income and expenses, and any other relevant information.

#2 Complete Separate Tax Returns- Each spouse must complete their own tax return, accurately reporting their individual income, deductions, and credits.

#3  Report Spouse's Information- Even when filing separately, spouses are required to include their partner's information on their respective tax returns. This includes their spouse's name, Social Security number, and filing status.

#4 Choose the right Filing Options- Couples have several options for filing their separate tax returns, including E-filing, Paper filing, and filing through Professional assistance. It is important to consult an experienced tax preparer or accountant especially in more complex situations.

The Bottom Line

Filing taxes separately as a married couple can be a complex decision that requires careful consideration of various factors, including income levels, deductions, tax credits, and potential liabilities. While it may offer financial advantages in certain situations, it also comes with significant drawbacks, such as the loss of valuable tax credits and deductions. Given the intricacies involved, it is highly recommended that couples seek professional advice from qualified and experienced tax professionals such as NSKT if they are unsure about which filing status is most beneficial for their specific circumstances. A tax professional can provide tailored guidance and help navigate the complexities of the tax code, ensuring that couples make an informed decision.