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Married Filing Separately: For Better or For Worse?

written by: Patricia Tokar, CPA•edited by: Laurie Patsalides•updated: 12/28/2009

Most married couples simply assume that they will file a joint tax return. After all, common wisdom says that filing a joint return will result in a lower Federal tax bill. Maybe so, but it may be very worthwhile to consider filing separate tax returns.

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    Always Compare Under These Circumstances

    There are certain situations when you should always compare filing a joint return with filing separately. Compare the results of a joint return and separate retun when one spouse has:

    • Large medical bills that exceed 7.5% of their adjusted gross income.

    • Large employee business expenses, such as unreimbursed business mileage on a personal vehicle that exceed 2% of their adjusted gross income.

    • Miscellaneous itemized deductions that exceed 2% of their adjusted gross income, such as investment management fees, passthrough deductions from an estate or trust, or job search expenses.

    • A large casualty loss, such as an uninsured property loss from an accident or storm, that exceeds 10% of their adjusted gross income.

    (Note: Adjusted gross income is simply all of your taxable income less certain deductible adjustments such as contributions to an individual retirement account, contributions to a health savings account, tuition, and self-employed health insurance payments. Follow the lines down the front of the Form 1040 for calculating adjusted gross income.)

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    When Married Filing Separately Can Be Costly

    The tax rates for married filing separately are overall the highest individual rates. The effect is minimized, however, when the spouse’s incomes are nearly equal.

    Other commonly costly areas when filing separately include:

    • The credit for child and dependent care expenses will be eliminated in most cases

    • The earned income credit cannot be taken

    • The education credits and the tuition and fees deduction cannot be taken

    • More of your Social security income and railroad retirement benefits will probably be taxable

    • The retirement savings credit will be reduced or eliminated

    • The capital loss deduction on a separate return is limited to $1,500

    • The first-time home buyer credit is limited to $4,000 (for homes purchased from 1-1-09 to 5-01-10)

    • The first-time home buyer credit for qualified buyers who already own a home is limited to $3250 (homes purchased after 11-06-09)

    • The student loan interest deduction may not be taken

    • The amount you can contribute to a Roth IRA will be limited or eliminated

    • The exclusion for the Education Savings Bond Program cannot be taken

    • The deduction for a contribution to your regular IRA will be quickly reduced or eliminated if your spouse is covered by a retirement plan at work

    • The deduction for losses on rental properties may be reduced or eliminated

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    When You May Want to File Separately Regardless

    (Note: if you live in a community property state, you have special rules regarding how and if you can split income between spouses. The advice in this section may apply differently to you.)

    One benefit of filing separately from your spouse is quite simply that it protects you from your spouse’s tax debts. When you report your income separately, you will owe only your own tax. This can be especially reassuring if you are uncomfortable with your spouse’s aggressive or questionable handling of items on their return. It can also prevent you from paying the tax bill if the IRS discovers that your spouse did not report all of his income.

    Even with an aboveboard tax return, you may want to file separately if your spouse’s income creates a large tax bill that you cannot pay. Filing separately will offer protection to your joint accounts and property. It should also protect your paycheck from being garnished to pay your spouse’s tax bill.

    If your joint return shows a balance due, you may also want to check to see if filing separately will allow one of you to receive a much needed refund.

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    Other Considerations

    When filing separately, if one spouse itemized deductions, the other spouse must itemize also, even if their deduction would be less than the standard deduction.

    If you and your spouse did not live together for the full year, then you may qualify for head of household (and possibly even single) filing status. In addition, you may be able to claim some of the credits and allowances that are generally denied when filing separately.

    While there are some special rules, in general the shared itemized deductions can spilt between the returns by your own method or agreement.

    If you would both otherwise qualify to claim your children as dependents, then you and your spouse can agree which one of you will claim your dependent children. If you are unable to agree, then special rules will determine who is able to claim the children.

    Once a joint return has been filed and the due date has passed, you cannot later amend the return to filing separately. However, if you file separately, you may later (within time limitations) amend the return to a joint return.

    If your spouse did not have any income, you may be able to file a separate return and still claim them as an exemption.

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    One Last Caution

    Filing separately can be complex and is one area where you would be well advised to have a tax professional prepare your returns, or at least to review your self prepared return before you file it.

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    This article is not intended to be specific tax advice. It is intended as a general guideline only. Any specific advice should be sought from your tax professional.

    CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Department guidelines, any federal tax information contained in this article, or any attachment, does not constitute a formal tax opinion. Accordingly, any federal tax advice contained in this communication, or any attachment, is not intended or written to be used, and cannot be used, by you or any other recipient for the purpose of avoiding penalties.

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    IRS Publication 501