Q: So I’m married but I’m not sure if I should file my taxes with my spouse. I’ve heard that I can file separately, but is there anything I should consider before doing so?
A: Most married folks just assume they should always file their taxes together. While this is normally the case (we typically advise married individuals to file together), there are some instances when it’s beneficial to file separately. If you are considering going the separate route, just know that it’s not necessarily equal.
The MFS filing status is available only to those who are, well, married. But for those who tied the knot in 2011 (meaning those who were both single and married last year), this can be a little confusing. If you were married at the beginning of last year, you generally retain that tax status for the whole year unless you were divorced or separated under a decree of separate maintenance (same thing as divorced under the tax rules) as of Dec. 31, 2011. If you married during the year and were still hitched on December 31st, your options are generally limited to filing jointly with your spouse or using the MFS status.
Isn’t Filing Jointly Better?
Assuming you were in fact married at the end of last year, you may think filing jointly for 2011 as opposed to using MFS status is the no-brainer choice. Generally, the biggest reason to file jointly is because it eliminates the need to track and report each spouse’s income and deductions. Additionally, using the MFS status makes filers ineligible for several popular tax breaks that could save them dough if they file jointly (more on this later).
Filing jointly usually does lower the tax bill when one spouse earns a healthy amount of income while the other has little or none. That’s because the joint-filer tax brackets are exactly twice as wide as the MFS brackets. For example, the 28% federal income-tax bracket for joint filers starts at taxable income of $139,351 for 2011. In contrast, the 28% bracket for MFS filers starts at $69,676 of taxable income.
Using an example to illustrate, let’s say that Joseph and Mary earn a combined $100,000. Joseph earns $90,000 at his job and Mary earns $10,000 as she primarily works as a stay at home mother. If Joseph and Mary file together, their combined income puts them in the 25% bracket and their tax bill is $17,250. If they file separately, Joseph gets pushed into the 28% bracket and has to pay $19,235 while Mary is in the 15% bracket and has to pay $1,075. The result is the couple will pay $3,060 more in taxes by filing separately. So when one spouse earns quite a bit and the other not so much, filing jointly will usually cut their tax bill.
When to File Separate Returns
It’s generally advantageous to file separately when 1) both you and your spouse have taxable income, and 2) at least one of you (preferably the person with the lower income) has significant itemized deductions that are limited by adjusted gross income (AGI).
The three most common itemized write-offs that are limited by your AGI level are:
- Medical expenses, which you can deduct only to the extent they exceed 7.5% of AGI.
- Uninsured personal-casualty losses (like hurricane damage to your home), which you can deduct only to the extent they exceed 10% of AGI.
- Miscellaneous itemized expenses (usually nonreimbursed employee business expenses and investment expenses), which you can only deduct to the extent they exceed 2% of AGI.
When you have these types of expenses, filing separately can lead to tax-saving results, because the AGI numbers on your separate returns will be lower. Therefore, deductions that are limited by your AGI may be considerably higher when you file separately.
What You’ll Lose By Filing Separately
If you do decide to file separately, just know that the IRS is going to penalize you. With that said, you can’t claim any of the following if you use MFS:
- You can’t claim the child and dependent-care tax credit
- You can’t claim the deduction for college tuition and related expenses
- You can’t claim the American Opportunity/Hope Scholarship or Lifetime Learning tax credits for higher education expenses
- You can’t claim the student loan interest deduction
- You can’t deduct more than $1,500 of capital losses against ordinary income (compared to $3,000 if you file jointly)
- You can’t make a Roth IRA contribution if your AGI exceeds $10,000 unless the spouses lived apart all year
- You can’t convert a traditional IRA into a Roth account (prior to 2011)
- You must itemize deductions if your spouse itemizes (you can’t claim the standard deduction)
This list is far from exhaustive, which is why you should always have your tax preparer “run the numbers” to evaluate whether the MFS status might be beneficial.
It’s Never Too Late
If you discover that filing separately would cut your 2011 tax bill, it’s not too late to change your filing status even if you’ve already filed a joint return for 2011. Just file an amended return that substitutes two MFS returns for your original joint return. However, make sure you get the job done before the April 17th 2012 (due to the DC holiday) filing deadline. The IRS doesn’t allow you to file an amended return switching from joint to MFS status after the due date.