Does Married Filing Separately Make Sense?

What is married filing separately?

Simply put, married filing separately is exactly what it says: each spouse files a separate return. Each reports their own income, deductions, and credits. This is in contrast to the married filing jointly option, which sees both spouse’s income, deductions, and credits as one.

Some married couples file separate returns because each only wants to be responsible for his or her tax, and not their spouse’s. This often happens when a marriage is unstable and the lack of trust between the two spouses is growing.

Less distressing explanations can be found in other life circumstances. Parents who remarry, for example, may have children from the prior marriage and wish to keep their finances separate. This often happens when he or she believes they can save money by filing a separate return. That, or they want to avoid the tax liabilities which may be imposed on them in a joint filing. To see if your situation is better suited for a married filing separately or jointly filing status, speak with a tax professional.

While the reasoning varies from couple to couple, the consequences are generally very similar.

The benefits of married filing separately

In general, there are three situations in which we see married filing separately to make financial sense: money management, deductions, and debt. With all of these situations, it is better to have a tax professional on your side than to go in blind. You are likely unaware of the small changes which can be made to your filing that can be used to not only minimize these issues, but to also help you keep as much of your income as possible. Book a free one hour consultation with a tax pro as soon as you can.

Money Management Struggles

Beginning with money management, it’s important to remember that not everyone is financially literate. That is, not everyone understands the ins and outs of properly saving, spening, or investing money for their greatest benefit. If your spouse is just bad with money, he or she is risking higher taxes, getting audited by the IRS, and a reduced refund. When you file jointly with them, you deal with those exact same issues. Those married filing separately do not!

Higher Itemized Deductions

If one spouse is capable of getting a higher itemized deduction by filing separately, then this might be a good choice. Expenses that can be itemized off of your tax charge can include charitable contributions and medical expenses. If one spouse has used our Charitable Remainder Trust method for avoiding crypto taxes, this is a great opportunity.

Keep in mind, though, that if you file separately and on spouse itemizes, then you must both file for itemized deductions. The spouse without the higher deductions may find that their return is smaller than it would’ve been if they could take the usual standard deduction. Because of this, it is best for both spouses to discuss married filing separately ahead of time.

Debt Seizures

Debt is the final and most legitimate argument against married filing jointly, but it is also the most rare. We aren’t talking about minor credit card debt, here. The type of debt that you should watch out for is debt that is subject to refund seizure. This is nigh-impossible to escape, as the IRS will force you to pay, one way or another. If your spouse owes taxes, child support, or has outstanding loans after bankruptcy, married filing separately is a great call.

The drawbacks of this filing strategy

Generally, couples who file separately find themselves experiencing a tax rate higher than they would have on a joint return. Why is this? Because you will no longer be eligible for deductions which every married filing jointly couple can use:

• Standard deduction if your spouse itemizes (you will need to itemize too)
• Student loan interest deduction
• Child and dependent care expenses credit
• Earned Income Tax Credit (EITC)
• Adoption credit
• American Opportunity Tax Credit
• Lifetime Learning Credit

If you try to claim the Child Tax Credit (CTC), the retirement savings contributions credit, or other credits, you’ll also find that you’ll receive less than those who file as married filing jointly. The IRS explains other drawbacks to married filing separately here.

Higher Income Tax Rates

As you might have noticed, a lot of the reasons why spouses shouldn’t file separately are under the hood. These deductions and credit disparities aren’t things you notice until you’re well into filing your return. At that point, you have already used up a lot of time and may not want to start all over again.

An easy way to illustrate the drawbacks of married filing separately is to compare the federal tax rates between it and married filing jointly. More details can be found in Revenue Procedure 2021-45.