We know that married couples often take advantage of a valuable tax deduction by filing joint returns. But that deduction doesn’t always provide the most benefit for everyone. In some cases, it makes sense to choose the “married filing separately” option… Why?
Combined earnings places the couple into a higher tax bracket. When you file a joint return, both of your incomes are added together to determine your tax bracket, and therefore your taxation rate. In some cases, filing returns separately means you each fall into a lower tax bracket, and therefore pay a lower percentage as a tax rate. Of course, you might each need to utilize deductions and credits in order to reap actual savings from this strategy.
Filing separately helps you utilize miscellaneous deductions. Miscellaneous deductions can help you save money on your taxes, but the total deductions must amount to more than 2 percent of Adjusted Gross Income (AGI) before you can claim them. With your incomes added together, the AGI might be too high for one or both of you to utilize the deductions otherwise at your disposal. Filing separately means lower AGI, and might make those deductions count.
You have significant un-reimbursed healthcare costs. The AGI also determines whether you can deduct un-reimbursed healthcare expenses. You can’t use this deduction unless your medical expenses total more than 7.5 percent of your AGI, so separating your income might prove valuable from a tax standpoint. This threshold changes to 10 percent beginning next year, by the way.
Likewise, casualty losses must amount to 10 percent of AGI before you can deduct them.
You don’t want to be responsible for your spouse’s tax bill. In some situations, the IRS can seize refunds. If your partner has made a mistake (such as falling behind on child support), filing a separate return can allow you to receive your own refund, if one is due, without being impacted by your spouse’s situation.
You’re getting divorced. If you’re separated, but still legally married, you can choose to file jointly or separately. Some people choose to file separately, simply to avoid future ramifications of any tax mistakes their partner might make.
It’s important to remember that tax rules can change from year to year, so continue to reevaluate your filing status with your tax professional each spring. And as always, continue to meet with us regularly so that we can discuss other aspects of your long-term financial plan.