We're now well into 2018's tax season, and one very common question I hear from married couples is "Should we file a joint return, or file separately?"
The easy answer is to say that it's usually a better idea to file a joint tax return, but this isn't always the case. Under some circumstances, it could make good financial or legal sense to file your returns separately. Here's an overview of what you lose by filing separate returns, and a few situations when filing separately could still be the better choice.
It's usually a better idea to file jointly
Many people (incorrectly) believe that if you're married, filing separate tax returns is effectively the same as filing single. However, that's simply not the case. The reality is that you can lose several valuable tax breaks by filing separate returns.
Just to name the most common, these tax breaks are either unavailable to you or are severely limited if you file a separate return from your spouse:
- The Child and Dependent Care Tax Credit.
- The two main tax credits for college tuition -- the American Opportunity Credit and Lifetime Learning Credit. The deduction for tuition and fees is also severely limited.
- The ability to deduct traditional IRA contributions or contribute to a Roth IRA.
- The Earned Income Tax Credit.
- The Adoption Tax Credit.
- The Student Loan Interest Deduction.
- Tax-free exclusion of U.S. bond interest and Social Security benefits.
However, some couples may be better off filing separately
There are some situations when filing separately may be a smart idea.
If you, for whatever reason, want to keep your tax liability separate, it can be a smart defensive move to file separately. By filing jointly, you are agreeing to share responsibility for all income reported and other information in your tax return. Filing separately "insulates" you from your spouse's claims.
For example, if you are suspicious that your spouse tends to inflate his or her deductions, it can be smart to file separately. Or if you and your spouse live separately but aren't yet divorced, separate tax returns can help keep your finances separate. This can be especially beneficial if one of the separated spouses can qualify for head of household status.
Additionally, if one spouse has a big itemized deduction, it can make filing separate returns worthwhile. Medical expenses are one common example. You can only deduct medical expenses that exceed 7.5% of your adjusted gross income.
To illustrate this, let's say that you paid $10,000 in medical expenses in 2017, and that you earned $25,000 while your spouse earned $75,000. In this case, filing a joint return would only entitle you to a $2,500 deduction, while filing separately would get you a $8,125 medical expense deduction.
The deduction for unreimbursed employee expenses, which are only deductible to the extent that they exceed 2% of your AGI, is another example of a deduction that can be beneficial to married couples filing separately.
To be clear, a deduction like this all by itself doesn't make filing separate returns a good idea. The point is that if the gain from the deduction outweighs everything you give up.
What is best for you?
The bottom line is that there are pros and cons involved with spouses filing jointly and separately, and the right choice for you depends on your individual tax situation. The good news is that many software programs and tax preparers can run your information through both options to determine which method would result in the lowest tax bill for you.