When it's better for couples to file separate tax returns
Preparing your tax return requires you to make all sorts of decisions regarding ways to get the optimal results. One of the more vexing choices faces couples: Should they file jointly or separately?
Any married couple (or those living together in a state-recognized common-law marriage or who are still married but waiting a final divorce decree) can elect to file jointly or separately. But if you're in those categories and choose to file separate tax returns, both taxpayers have to agree to do so, and both have to agree to either itemize deductions on Schedule A or claim the standard deduction.
According to the most recent IRS data, only about 5 percent of all married taxpayers filed separate tax returns, which seems surprisingly low.
It's important to note that filing separate tax returns doesn't result in allowing each person to fall into a lower tax brackets and thus pay less tax. It doesn't work that way. The taxable income brackets for married filing separately are exactly half of brackets for married filing jointly. For example, the taxable income bracket where the 28 percent tax rate begins for marrieds filing jointly is $151,200 and for married filing separately is $75,600.
Still, sometimes filing separate tax returns can result in paying less overall taxes. Here are a couple of things to consider:
Unreimbursed medical expenses
Unreimbursed out-of-pocket medical expenses can be claimed as an itemized deduction for amounts that exceed 1o percent of the taxpayer's adjusted gross income. But if a couple has AGI of $100,000, and one spouse has incurred $10,000 of out-of-pocket medical expenses, none of this would be eligible as an itemized deduction.
But if this couple files separately, and the one who incurred the medical expenses has AGI of $40,000, then $6,000 of the medical expenses could be eligible to be claimed as a deduction. Combined with other allowable deductions, this could significantly exceed the standard deduction for separate filers, which is $6,300 for each.
Miscellaneous deductions
Miscellaneous deductions that can be claimed on Schedule A can also lower taxable income. But to do so, these deductions must first exceed 2 percent of AGI. So, if one spouse has paid a significant amount of costs for things like union dues, job search costs and unreimbursed business expenses, it may be worthwhile to file separately. You (or your tax pro) can prepare your tax returns under both filing statuses and compare the total liability under each option. Don't forget to include the results for your state tax returns when you do this.
Who do you trust?
Finally, a good reason to file separately is when you don't feel comfortable taking full responsibility for a tax return filed jointly with your spouse. Both spouses must sign a jointly filed return, and each one is responsible for the completeness and accuracy of the entire tax return. And each will each bear full responsibility to the IRS for any additional tax, penalty or interest due on an incorrect tax return.
If you don't want to merge your tax life with your partner's, choosing the separate filing status offers a level of financial protection because you're responsible only for your own separately filed tax return.