Filing Separately To Save With Unforeseen Expenses
- Unless out-of-pocket medical expenses exceed 7.5% of AGI for 2021, they don’t qualify as a deduction.
- Casualty losses must also total more than 10% of AGI and occur in a federally declared disaster area.
The spouse with the loss or substantial medical outlay calculates deductibility against his or her own lower AGI when the couple files separate returns. When one spouse can lower taxable income this way, married filing separately might trim a couple’s overall tax burden.
Youre Applying For Certain Student Loan Repayment Plans
Another reason you may wish to file separately is to qualify for an income-driven repayment plan to lower federal student loan payments. The Income-Based and Income-Contingent Repayment Plans plus the PAYE Plan allow married borrowers who file separately to have their payments determined based on their income alone.
What Is Married Filing Separately
When filing separately, the couple files two separate tax returns. A spouse puts their income, expenses, and deductions on one federal return. The other spouse puts their information on a completely different tax filing. When filing separately, if one spouse itemizes their deductions, the other spouse must do the same. This prevents the spouse that would prefer not to itemize from benefiting from a higher standard deduction. It is possible that, by filing separately, both spouses will be in lower tax brackets, thereby keeping their tax rates lower.
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Diverse Pay Or Deduction Scales
Protecting yourself from a negative outcome isn’t the only reason to file separately. Today, even the most happily married couple may come out ahead by choosing this route.
The primary instance is with childless couples, in which one spouse has a considerably higher income and the other spouse has substantial potential itemized deductions.
For example, consider a situation in which one spouse is a doctor earning $200,000 a year, while the other is a teacher earning $45,000. The teaching spouse has had surgery during the year and paid $12,000 in unreimbursed medical expenses. The IRS rule for deducting unreimbursed medical expenses dictates that only expenses in excess of 7.5% of the filer’s AGI can count as a miscellaneous itemized deduction.
- If the couple files jointly, only expenses in excess of $18,375 will be deductible. Therefore, none of the teacher’s medical expenses could be deducted because they total less than $18,375.
- But if the couple filed separately, the cost would easily exceed the teacher’s threshold for medical deductions, which would be $3,375 , based only on the teacher’s AGI. This would leave an eligible deduction of $8,625 for the teaching spouse to claim on Schedule A of Form 1040 .
Even if, in a normal year, it would make more sense for this couple to file jointly, in the year of the big medical expense, filing separately might make more sense.
How Married Filing Separately Status Impacts Taxes
That said, MFS status can be somewhat more beneficial for taxpayers who want to claim the itemized deductions with income threshold requirements. For example, the medical expense deduction is only available for the portion of your expenses that exceed 7.5% of your adjusted gross income as of the 2020 tax year. This can be a much lower threshold to meet on one income than on two combined incomes when you’re filing jointly.
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How Filing Separately Or Jointly Impacts Married Couples Taxes
Filing your taxes might not be the first thing that comes to mind after getting married, but couples should know that marriage has an impact on your filing status options and how your income taxes are calculated.
There are five filing statuses for taxpayers: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow with Dependent Children. Below we explore the differences and benefits of the two options for married taxpayers: Married Filing Separately and Married Filing Jointly.
Situations Where The Tax Calculation Is Better If Filing Separately
Medical expenses and charitable deductions are the two main deductions that are limited by Adjusted Gross Income . For medical expenses, you’re only able to deduct to the extent the expenses exceed 10% of your AGI. In the example below, consider a situation where one spouse has an AGI of $100,000.00 with medical expenses of $70,000.00. The other spouse has an AGI of $250,000.00 with total itemized deductions of $80,000.00. Remember if one spouse itemized, the other spouse may not take the standard deduction. The examples below show the spouse’s taxes due for married filing separately compared to married filing jointly filing status.
As you can see, here, the spouses had tax savings due to filing separately. This is a rare case. Usually, the spouses would have done better by filing a joint return. In this case, the higher itemized deductions due to Spouse 1 filing separately was enough to tilt in favor of married filing separately. Even with high medical deductions available filing separately, the married filing jointly side was able to stay in a lower tax bracket. This is not always the case. You have to run the calculations on a case by case basis to see which method is better.
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What Is Innocent Spouse Relief
Before or after a spouse passes, the IRS allows for an exemption from spousal tax liability. This is called Innocent Spouse Relief. A person can apply for Innocent Spouse Relief when his or her spouse has a large tax debt to which the other spouse did not consent and had no knowledge. This can separate the innocent spouse from potential IRS issues, removing his or her liability from the debts incurred by the other spouse.
How Do I File A Separate Return
If you’re legally married at the end of the tax year, you can file jointly, but the IRS doesn’t limit you to the joint return. You can file either “Married filing separately” or “Head of household” depending on your circumstances. Filing as head of household allows you to claim the standard deduction even if your spouse itemizes deductions and allows you to claim additional credits such as the dependent care credit and earned income credit. The IRS may also tax you at a lower rate.
For you to be able to file as head of household, all of the following must be true:
- You paid more than half the cost of maintaining your home for the tax year. Maintaining a home includes rent, mortgage, taxes, homeowners’ insurance, utilities, and food eaten.â¢ Your spouse did not live with you for the last 6 months of the tax year.â¢ Your home was the main home of your child, stepchild, or eligible foster child for more than half the year.â¢ You could claim a dependent exemption for the child.
If you file as head of household, your spouse must file as married filing separately. Once you are divorced, you may still file as head of household if you pay more than half the cost of maintaining your home for the tax year and your children live with you for more than half the tax year.
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Newlyweds And Income Tax Withholding
When you get married, it’s a good time to check your income tax withholding and make sure you’re not having too much – or too little – withheld from your paycheck. It is important to file a new Form W-4, with the Married checkbox selected, with your employer after your marriage. When you do, it may be equally important to adjust the amount of withholding on the Form W-4. For example, if you and your spouse make similar incomes, you may need to have more income tax withheld to avoid a potential tax bill next year.
On the other hand, if your spouse has little or no income, your income tax bill when you file jointly may be considerably less. You may need to have less income tax withheld to avoid having the IRS hold too much of your money all year.
Eligibility Requirements For Married Filing Separately
If youre considered married on Dec. 31 of the tax year, then you may choose the married filing separately status for that entire tax year. If two spouses cant agree to file a joint return, then theyll generally have to use the married filing separately status.
If you have a dependent living at home and youre considered unmarried by the IRS, you may qualify for the head-of-household filing status, which is typically more beneficial than married filing separately.
To be considered unmarried for tax purposes you must meet all the following criteria:
- You lived separately from your spouse from July to December of the tax year .
- You file separate tax returns.
- You paid more than half the cost of maintaining your home for the tax year.
If you meet the criteria to be considered unmarried and want to file as head of household you must also have had a child, stepchild or foster child residing with you for more than half the tax year that you can claim as your dependent.
A few life events may cause you to change your status to or from married filing separately, including the following:
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You Lack Spousal Consent
You must file a separate return if your spouse is unwilling or unable to consent to file a joint return with you. This is because both of you must sign the return when you file jointly. An exception to this rule exists when one spouse dies during the tax year. You can still file jointly for that year if you choose, but you can file separately as well.
Different rules apply to married couples filing separately in community property states . This can impact the benefits or drawbacks of choosing MFS in those states.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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What Is Married Filing Separately Status
If you are married and file separately, youre only responsible for your own return, and thereby your own tax payments. Likewise, if you are due a refund, it will be delivered to the account you indicate on your return.
The income spans for tax brackets aren’t as generous if you use the married filing separately status, and you’ll be disqualified from claiming several tax deductions and credits. Plus, income phaseout limits for other deductions will be more prohibitive as well. The flip side is that you won’t be liable for taxes on the income your spouse earned and you can’t be held legally responsible for any errors or omissions on your spouse’s return.
Some spouses just prefer to keep their finances as separate as possible.
Using Miscellaneous Deductions By Filing Separately
- Spouses with union dues, job-search costs, tax-preparation fees and un-reimbursed business expenses may find their miscellaneous deductions don’t qualify when their higher combined income raises their AGI.
- A spouse who travel frequently for business could rack up a sizable tally in airline fees for baggage and itinerary changes that makes the miscellaneous deduction worth pursuing.
Beginning in 2018, these types of miscellaneous expenses are no longer deductible.
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How Are Back Taxes Handled After Death
Even if partners in a marriage choose to file taxes their separately, when one partner passes away, the IRS may attempt to take some or all of the back taxes from the deceased spouses estate. Often, the deceased persons spouse is an heir to the estate, and even though the IRS can try to claim some of the back taxes from the deceased persons estate, the agency cannot obligate the surviving spouse to pay them. Therefore, back taxes can reduce the amount a surviving spouse receives from their loved ones estate, but the IRS does not directly tax that spouse if the couple filed for taxes separately.
Filing Separately To Avoid The Tax Liability Of The Other Spouse
You may want to file separately from your spouse to protect yourself from the tax liability of your spouse. Small businesses and independent contractors are much more likely to fall behind on taxes than regular employees. If you work for a corporation that gives you a paycheck with your taxes already deducted, it’s unlikely you will have significant problems with the tax authorities. Business owners and independent contractors have to pay the taxes themselves. A business owner may do this partly by paying themselves a regular tax deducted paycheck. Still, both business owners and independent contractors often need to pay estimated taxes. These people do not have someone else doing it for them. They have to do it themselves. When operating your own business, there isn’t always enough money to pay all the bills on time. This tempts business owners to pay the tax authorities later. If the business fails, this leaves the business with a large tax liability. As a general rule, it’s a good idea to file separately if you work in a stable job, but your spouse is trying to start a new business. Another situation where it’s a good idea to file separately is if your spouse has a history of unpaid back taxes. You do not want to become entangled in your spouseâs tax problems.
Special Considerations in the Community Property States
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When Married Filing Separately Will Save You Taxes
If you’re married, there are circumstances where filing separately can save you money on your income taxes.
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The IRS considers taxpayers married if they are legally married under state law, live together in a state-recognized common-law marriage, or are separated but have no separation maintenance or final divorce decree as of the end of the tax year.
Of the 150.3 million tax returns filed in 2016, the latest year for which the IRS has published statistics , 3.07 million belonged to twosomes who filed separately.
- These partners reported individual income and expenses on individual tax returns.
- They had to agree on either itemizing expenses or using the standard deduction.
- By filing separately, their similar incomes, miscellaneous deductions or medical expenses likely helped them save taxes.
How Married Filing Separately Works
Although most married couples file jointly, they can choose the married filing separately status if they want. There are rules to follow for filing separately, though.
If one spouse itemizes instead of taking the standard deduction, for example, the other spouse must itemize, too. Youll also have to decide which spouse gets each deduction, and that can get complicated.
Plus, there are a bunch of deductions and credits you probably wont be allowed to take if you file separately, such as the credit for child and dependent care expenses, the earned income credit, the adoption credit, education credits and the deduction for student loan interest.
Filing separately isnt the same as filing single. Only single people can file single, and their tax brackets are different in some cases from the ones that will apply to you if you’re married and filing separately.
Nonetheless, in the right circumstances, being married and filing separately could save you money. Here are a few things to think about if youre considering whether its right for you.
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Youre Struggling With Student Loan Debt
Student loan debt in the U.S. has reached staggering proportions and approximately 70% of students leave school with loans. The average debt load hovers right around $30,000. For grads who are struggling to find their way in the job market, paying it down can be a challenge. Opting for an income-dependent repayment plan can offer some short-term relief but qualifying can be a challenge if youre married.
If you file your return jointly, an income-based repayment plan will consider both you and your spouses income. This happens even if only one of you carries the responsibility of paying the debt. When you file separately, only your income is taken into account to determine what kind of payments you qualify for. Again, youre sacrificing certain other tax benefits. If you dont have kids and normally take the standard deduction, you may not feel as much of a pinch.
Your Medical Expenses Are Very High
For the 2020 tax year, filers can begin to deduct medical expenses once the total amount exceeds 7.5% of their adjusted gross income . When spouses’ incomes are combined, the threshold can be exceptionally hard to meet. Further, it’s usually not worth doing unless the deductible amount is higher than the standard deduction for married couples who file jointly.
Filing separately would allow both spouses to begin deducting qualified medical expenses after they exceed 7.5% of their own AGI. Remember, though, that itemizing deductions will disable either spouse from claiming their separate standard deduction of $12,400 .
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