The most advantageous way for married people to file their income taxes is married filing jointly (MFJ). There are, however, circumstances involving state taxes or large medical expenses, where a married filing separately (MFS) tax status has a financial advantage. If you are legally married as of December 31 of the tax year, the Internal Revenue Service would prefer you file jointly to simplify reporting and compliance issues. There are, thus, more disadvantages to MFS than advantages. The best way to determine whether or not to file as one or the other is to actually calculate your tax return using the two different filing statuses and compare the final balances owed (or refunds due). If you are married and are contemplating filing separately, seek professional advice before you prepare your income tax returns.
Consider the few advantages a legally married couple might have filing their income taxes separately. If a spouse has lived away from a "main home" for more than six months, the spouse in the home with a dependent can alternatively file Head of Household. Another consideration is that special debts that could trigger an income tax refund offset, such as child support or outstanding student loans, will only affect the return of the spouse who incurred the debt. Yet another special situation could arise with medical and dental expenses that are deductible only if they exceed a 7.5% threshold of the tax payer's adjusted gross income (AGI). Separation of incomes may provide an advantage to a spouse with large medical expenses and a lower AGI.
Since incomes are reported separately, one spouse does not have to assume full responsibility for the liability of the other. Remember though, that community property states will typically consider all property and income, not specifically identified as separate, to be "community"-owned. A spouse filing separately reports all income including their portion of the community-property income that arises from their marriage. Furthermore, any unearned income arising from community-owned property, such as interest income, is similarly divided between the two spouses. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. These states may also differ in their treatment of spousal liability. For example, California currently provides for "innocent spousal relief" but not relief for an "injured" spouse in tax liability issues. Remember too, that dependents can only be claimed once; just because you might be filing separately doesn't mean you can both claim the same child or split a dependent in half!
There are distinct disadvantages to filing separately. If you are married but file separately, you cannot take tax credits associated with adoption, education, child and dependent care nor earned income. You and your spouse must choose the same deduction method; whether itemized or standard. If you file separately but actually live together there are additional restrictions; you cannot claim passive loss from rental property, roll over certain retirement accounts, claim tax credits for the elderly or disabled, or calculate taxable social security at a lower, more advantageous rate. Calculate your taxes and compare the bottom lines; it's a question of money!
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