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Your Financial House: When “Married Filing Separately” Might Make Sense

Your Financial House: When “Married Filing Separately” Might Make Sense

We are frequently asked if a married couple should file separate returns. The question most frequently arises with newly married couples, couples in the process of a divorce, and when one spouse has unusual circumstances like an unusually large income or big medical expenses. Your marital status is determined on the last day if the year. If you are married you can file a joint return or you can choose the filing status of Married Filing Separately. You may not file as a single individual.

The answer, which is the right answer to almost any tax question, is “it depends.”

In almost all cases the tax rate schedules for Married Filing Separately vs. Married Filing Jointly favor the joint filing. Last year only 4.5% of married couples filed separately. Counting everyone filing as single individuals, that represented only 1.8% of all returns.

There are several tax breaks that favor filing jointly, such as education credits, deductions for student loan interest, and the credit for child- and dependent-care expenses. These credits and deductions typically can’t be used if you are Married Filing Separately.

On the other hand, if one spouse has substantial out-of-pocket medical expenses or investment or job expenses, there may be more benefit from those deductions by filing separately. Medical expenses are deductible to the extent they exceed 7.5% if adjusted gross income (10% in 2013 and forward), so there may be a deduction on the lower income spouse’s separate return that would not be allowed on a joint return. This has happened more frequently in recent years when one spouse is unemployed and has high COBRA expenses. The results might be similar with investment or job expenses that are only deductible to the extent they exceed 2% of adjusted gross income.

There may be non-monetary reasons for filing separately. If a couple is separated but not divorced they must make the choice. Both spouses are liable for the taxes if a joint return is filed. One spouse may be concerned about income that is not reported, or questionable deductions claimed by the other spouse. They can avoid liability for the other spouse’s taxes by filing separately. Even if the taxes on a joint return would be less, one spouse might have emotional reasons to file separately.

We always consider these issues when preparing tax returns. If any of the elements exist that might make filing separately more favorable we will test it. In the case of a separated couple we can calculate an estimate of the savings by filing jointly so the individuals can decide which way they want to file.

Give us a call at 303-815-1100 and learn more about how we can help you determine which choice is right for your situation.

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