Should Married Couples Consider Filing Separate Tax Returns?
Married filing jointly or separately

Date

The annual April 15th income tax filing deadline is less than a month away. That means, if you haven’t already filed this year’s return, your window to do so is closing soon.

Selecting your filing status is among the many elements to consider when filing your annual tax return. There are five potential filing status options:

  • Single
  • Married, filing jointly
  • Married, filing separately
  • Head of household
  • Qualifying surviving spouse

 

And while your applicable filing status may seem evident on the surface, the financial impact of each filing status isn’t always clear to taxpayers. This is particularly true when married couples decide to file jointly or separately.

Conventional wisdom says as a married couple, filing jointly is your most advantageous choice. This is primarily because many tax credits are only available to families, and many deductions are higher for families.

But there are a number of circumstances in which married couples filing separately makes sense. Here’s a brief rundown of the most common scenarios:

Legally Separated or Soon to Divorce

If you’re legally separated and on a clear path to divorce or making concrete plans to divorce, filing separately helps establish financial independence. It’s a step toward dividing assets and liabilities in your split. It also ensures that you and your former partner are obviously divided in tax situations moving forward.

Avoiding the “Marriage Penalty”

In some cases, your and your spouse’s combined salary, particularly if they are comparable, can push your joint filing into a higher tax bracket.

By filing separately, however, you remain in the lower bracket, as single filer brackets have more leeway than joint filer brackets.

Unpaid Tax Debt

If your spouse owes back taxes or is otherwise entangled with the IRS, joint filing could connect you to their tax debts. For the most part, filing separately precludes you from responsibility for your partner’s prior tax debts. This, in turn, prevents collections on their tax debt from being attached to your refund or other financial assets.

In an extreme example, if a couple files jointly and one spouse owes a significant tax debt they cannot pay, their partner’s wages could be garnished, and levies and liens could be placed against their assets.

Meanwhile, filing separately completely avoids this scenario.

Student Loan Debt

Federal student loan payments are based on your monthly income and family size. This means you and your spouse’s combined income would be used to set your loan payments. But filing separately reduces your income (potentially by half, depending on your relative salaries), which lowers monthly loan payments.

This course of action, however, depends largely on your individual circumstances. If you have children, for example, you will lose out on significant child tax credits if you file separately. Thus, it’s wise to run the numbers for filing jointly and separately to compare which offers greater savings.

Have More Questions About Your Filing Status?

If divorce, tax debts, or looming student loan payments are issues you’re grappling with this tax season, you and your partner may want to consider filing separately.

Given that this contradicts the prescribed approach, there’s much to factor in. If you have questions about the details — Get in touch for a FREE consultation!

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