Taxpayers who are married have two options when they file their tax returns. They can file jointly, which means that they are filing as a single tax-paying unit, or they can file taxes separately, which means that their respective incomes and expenses are figured apart from each other. In most cases, tax planners strongly advise clients to file jointly if at all possible, even if the couple is in the middle of a bitter divorce or other marital-related strife. Couples who file jointly are eligible to receive several tax credits and deductions that those who file separately cannot, such as the Earned Income Credit, Child Tax Credit and any credit or deduction pertaining to payment of higher education expenses. Both spouses will therefore usually lose money if they file separately. For this reason, the married filing separately status is considered to be the worst filing status and is to be avoided whenever possible.
Why File Separately?
Most tax experts tell their clients that there are really only two instances where filing separately from your spouse is justified. The first is if one spouse suspects the other of fraud or other dishonest activity and does not wish to attach his or her name to the tax return that the spouse is filing. Even couples who are separated or divorcing can leave their tax documents with a preparer and then sign them separately in order to get the credits and deductions that are given to joint filers. But both spouses are on the hook for filing a fraudulent return, regardless of whether one spouse disapproves of what the other is doing.
The other instance where it may be prudent to file separately only happens under a fairly specific set of circumstances. A married couple with no children or dependents to claim may be better off filing separately if one spouse has considerably more income to declare than the other AND the lower-earning spouse incurs substantial expenses that can be reported as itemized deductions.
Example
Dan and Betty Hill usually file jointly each year. Dan is a corporate executive and earns $200,000 a year while Betty works from home and earned an additional $27,000 last year. Betty wrecked her car last spring and the insurance company denied her claim, leaving her with a loss of $15,000. The rule for claiming unreimbursed property and casualty losses on the Schedule A of the 1040 is that any amount in excess of 10% of the filer’s AGI is deductible, minus a $100 per item deductible. Therefore, if the couple were to file jointly, the 10% threshold would be $22,700 ($227,000 x 10%), which would disallow the entire loss. But if Betty were to file separately, then her AGI threshold would be a mere $2,700, thus allowing a reportable deduction of $12,200 on her return.
It should be noted that if Betty files separately in order to claim this deduction, then Dan must also itemize on his return using whatever qualifying expenses he incurred during the year, even if their total is less than his standard deduction. Therefore, most couples who contemplate filing separately should probably have a return prepared both ways to see which is better. For more information on filing separately versus jointly, visit the IRS website at www.irs.gov or consult your financial or tax adviser.