Assessing the “Other” Filing Status

You see tax tables showing single, head of household, married filing jointly, and then “married filing separately” rates. Is it possible that you and your spouse should file under this last option?

The Internal Revenue Service generally encourages married couples to file jointly rather than separately, and it does so in a particularly direct way: it reduces or eliminates a number of tax benefits if each of you fills out a return on your own individual situation. Among other things, any student loan interest deduction is eliminated for separate filers, along with the college tuition expenses deduction, earned income credit, tax-free exclusion of Treasury bond interest (potentially a biggie), and the tax-free exclusion of some of your Social Security benefits. The deduction of net capital losses for both filers is reduced from $3,000 to $1,500.

Suppose you still want to consider filing separately. In that case, each spouse will be responsible for their own taxes, and won’t be held accountable for the other spouse’s errors in filling out the return. Neither spouse filing separately will be responsible for the other’s tax liability. There would need to be a certain degree of coordination, however. Both spouses would have to decide whether to take the standard deduction or itemize; that is, if one decides to take the standard deduction or itemize, the other has to do the same.

If a couple has significant itemized deductions that are limited by their joint adjusted gross income (AGI), then married filing separately may make sense. Suppose, for example, that the lower-earning spouse has paid a lot of medical expenses, above 7.5% of his or her AGI on the 2019 return; above 10% on a 2020 return. Anything over that threshold amount can be deducted on Schedule A.

Also, not a tax consideration, but suppose an individual is enrolled in an income-based student loan repayment plan. Married filing separately would result in a lower AGI and, therefore, a lower monthly payment than if the plan were based on the income of both spouses.

The most likely reason to consider filing separate tax returns is if a couple is divorcing and wants to start the process of de-mingling their finances. However, if they are no longer living together, and they have dependents, both parties should be able to file as Head of Household instead.

Most people will find the married filing separately option to be too complicated, not worth the hassle, and probably resulting in higher taxes. Besides, who wants to fill out two tax returns instead of one?

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