At least a hundred times per year, clients ask us if they should file separately from their spouses to pay less in income taxes. To define this issue a bit, married couples can file their tax returns using one of two statuses:
- Married filing jointly,
- Married filing separately.
A joint filing combines all of the income and deductions from each spouse into one tax return. To file separately, a married couple splits income and deductions between them. That doesn’t mean they just divide everything by two. They determine income and deductions for each and file separate tax returns.
I estimate that that filing separately works out maybe two times out of a hundred. The reason is simple. The tax code was setup to discourage separate filing. The tax tables impose a significant penalty for filing separately. In other words, in almost all cases, married couples achieve a better result filing jointly.
When can filing separately work?
Typically filing separately works better when there are significant differences in income and deductions between the spouses.
Medical expenses can drive this decision. When couples file jointly, medical expenses must exceed 7.5% of their combined adjusted gross income before receiving any deduction for medical expenses on schedule A.
If one spouse has significantly lower income and significantly higher medical expenses in a year, filing separately can work better, because the 7.5% threshold for medical expenses is easier to reach for the lower income spouse.
When we prepare tax returns for a married couple, we typically complete a worksheet that tells us if filing separately is a good possibility. If the results are close, we then look at better allocating deductions to see if we can make it work. In most cases, filing jointly still works better.
There can be reasons to not file jointly even if the net tax liability is lower. A pending divorce may trigger one spouse to file separately. Here’s why.
On a joint tax return, both spouses are jointly liable for any tax liability. With a divorce pending, one spouse may elect to file separately to not accept liability for income taxes generated by the other spouse.
One spouse may not trust the other to honestly report income and deductions. On a joint return, under audit, both spouses are still liable even if only one of them misstated the tax liability.
If one spouse elects to file separately, the other must file separately as well. In addition, if the first spouse to file a return itemizes deductions, the other must itemize as well.
In a pending divorce situation, the couple must jointly decide how to split income and deductions between them. Obviously, this leaves lots of room for conflict that the attorneys must sort out.