There are four basic tax filing statuses Americans can use: single, head of household, married filing jointly, or married filing separately. The first two are pretty obvious in regards to who can use them -- if you're not married and have no dependents, file as single, and if you're not married and have dependents, file as head of household. On the other hand, married taxpayers have two distinct options available, so which is the best to use?
In the vast majority of cases, filing a joint tax return is the smarter way to go. However, there are a few specific cases when married filing separately is the best choice. Here are a couple of common reasons you and your spouse might want to file separate tax returns, and the tax breaks you lose by choosing this option.
One spouse has a large medical expense deduction
If one spouse has a large deduction that would only be available if they file a separate tax return from their spouse, filing separately could be a smart idea.
A good example is the medical expense deduction, which is only available for medical expenses in excess of 10% of your AGI, regardless of filing status. Let's say that in a hypothetical married couple, one spouse earns $200,000 and the other earns $30,000, and that the lower-earning spouse had $20,000 in medical expenses last year. Based on the couple's combined income, the $20,000 would be less than 10% of their income, and therefore, no medical deduction could be taken.
On the other hand, if the spouses file separately, the 10% AGI threshold for the lower-earning spouse would be just $3,000, and $17,000 of the medical expenses would be deductible.
Consider other deductions based on a percentage of AGI
The same concept could potentially apply to miscellaneous itemized deductions, such as union dues, job-search costs, tax-preparation fees, and unreimbursed business expenses. These must add up to more than 2% of your AGI to be deductible, so in situations like the couple I mentioned earlier, this could be another situation where filing separately is a smart idea.
You don't trust your spouse
It's not an ideal situation, but maybe you don't trust your spouse with your good financial name. Under IRS law, both spouses are responsible for the information contained in the return, even if only one spouse prepared it.
On the other hand, by filing a separate return, your tax liability will be legally separated from your spouse's. You will not be liable for any fines, penalties, interest, or additional taxes assessed on your spouse.
Filing separately can be an especially smart idea if you're going through a divorce, as it can make your legal proceedings less complicated.
Tax breaks you lose by filing separately
As a final point, it's important to note that there are several tax breaks that aren't available to married individuals filing separately. Just to name a few:
- The child and dependent care credit
- The adoption credit
- Earned Income Tax Credit
- Tax exclusion of Social Security benefits
- Tuition and fees deduction
- Student loan interest deduction
- American Opportunity Credit and Lifetime Learning Credit
- The ability to deduct traditional IRA contributions, and contribute to a Roth IRA
The reason I mention this is that even if one of the situations discussed in this article apply to you, it can still be a bad idea to file separately if you would qualify for one or more of these tax breaks by filing a joint return.
The Foolish bottom line
No two tax situations are the same -- most married couples are better off filing a joint tax return, but there are some situations where filing separately could be the smarter idea. If one of the situations described here applies to you, it's certainly worth examining both ways to do your taxes to see which saves you more money.