So, what is Married Filing Separate and how can it save you some money (especially if you live in Ohio or Kentucky)?
Filing Options for Tax Returns
First of all, it is important to understand your filing options when you file a return with the IRS. The IRS allows 5 different filing statuses:
- Married Filing Joint
- Married Filing Separate
- Head of Household
- Qualifying Widow(er) with dependent child
Today, we are going to focus on the difference between Married Filing Joint and Married Filing Separate. The first requirement to use either status is that you are married on or before December 31st of the year. Yes indeed, if you get married at 11:59PM on December 31st the IRS considers you married for the entire year for tax purposes. So if you are planning a late night December 31st wedding, ask your CPA to do some tax planning for you before saying “I do.”
When to File “Married Filing Separate”
So when does it make sense to file as Married Filing Separate?
Well, the short answer is, Married Filing Separate (MFS) normally results in a higher Federal tax liability. Why is this? Well, the most important reason is that your effective tax rates will be higher on the same amount of income. The IRS adds additional limitations on the ability to take deductions and credits. If you currently take advantage of the dependent care credit, earned income credit, or education credits you are especially susceptible to a higher federal tax bill by filing as MFS. Additional considerations for MFS can be found in IRS Publication 17.
So, you might ask, why is MFS even an option? Is the IRS just trying to swindle us out of our hard earned money? No (at least not in this case), there are a few reasons why taxpayers might choose MFS, even though it increases their federal tax bill.
– The two spouses can’t agree to file jointly
Sometimes couples don’t see eye to eye in their financial lives. By filing MFS, each spouse is responsible for only their share of taxable income and deductions. For couples that keep relatively separate financial lives, the feeling of security in filing a separate return may offset the additional tax cost. For couples that are separated, MFS might ease the tension around tax filing. And if you suspect your spouse is not exactly being 100% truthful with the IRS, then you may not wish to sign off on a joint return.
– Itemized deductions
When one spouse has high itemized deductions it can sometime make sense to file separately. Medical expenses and miscellaneous itemized deductions both have floor limitations (which mean that you aren’t allowed to deduct the first $X.XX amount of money spent.) If the lower income spouse has a greater amount of medical or miscellaneous itemized deductions, then the couple’s tax liability might be reduced by filing MFS. Besides medical expenses, common miscellaneous itemized deductions are unreimbursed employee expenses, union dues, tax preparation fees, etc. It is important to keep in mind that shared expenses, like mortgage interest and real estate taxes, need to be split evenly between each spouse unless there is clear evidence that one spouse is footing the entire bill. Your CPA will help you determine a reasonable means to allocate your itemized expenses.
– State income tax liability
The last reason why you might decide to file MFS is to lower your state income tax bill. This seems counter intuitive, even though the Feds make it more expensive to file separately, the state benefit could lower your overall liability! In Ohio, you will need to prepare 6 returns to see if this makes sense for you (Fed & State joint, and Fed & State for each spouse). You shouldn’t always rely on your tax software to do this, as some don’t take into account the state benefit automatically. Kentucky makes it much easier for its residents. You simply check a box on the return and it doesn’t matter if you file joint or separate for KY purposes.
So Now What?
The bad news is, if it is after April 15th, it is too late to amend your return to MFS if you already filed a joint return. However, it is never too early to start planning for next year. Put a note in your year-end tax file to determine if married filing separately will save you some money next year.