Filing Taxes Separately Could Save Couples Big Bucks — When It Works to Your Advantage

Couple looking through important papers
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For years, it’s been known that one of the big perks of getting married are the many financial advantages at tax time. While not exactly romantic, it is practical, allowing for a reduced tax burden if one spouse makes significantly less. Many other additional deductions become available as well, according to the Tax Act blog.

Yet lately, many couples are now saying “I do” to filing their taxes separately due to two big reasons — healthcare costs and student loans.

According to The Wall Street Journal, citing the latest IRS data available, the number of taxpayers submitting returns as “married filing separately,” or MFS for short, rose to 3.9 million from 2.6 million as of 2020. Much of the reasoning behind said increase was attributed to Americans wanting to reap the pandemic-era financial incentives aimed at individuals but, as the paper pointed out, the uptick started even before that life-changing event. 

Though those numbers still pale in comparison to the 55 million couples that file jointly, there is growing reason for couples to consider separate filing status.

Reduced liability 

When you file separately, even though you are married, you are not responsible for any of the information on your spouse’s return. In an era where separation and divorce are common parts of marriage — nearly half, according to the CDC’s rate per population comparisons — this can be advantageous if you are in a transition period.

It can also help if your spouse has a significantly different gross income and you want to figure out a way in which one of you can get a refund due to marriage “penalties” and “bonuses.” According to the Tax Foundation, a penalty exists when the tax bill increases when a couple files jointly and can happen when two people “with similar incomes marry.” However, a bonus happens when the tax bill decreases when filing jointly as can happen when “two individuals with disparate incomes marry.”

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Reducing your tax bill

Although it’s not often an MFS can result in a lower tax bill, it may happen in certain cases — such as when one spouse has a lot of medical bills. As GOBankingRates reported, you can deduct some medical expenses from your taxes. For the year 2022, the IRS allows you to do so for the portion of your medical expenses exceeding 7.5% of your adjusted gross income, or AGI. However, if a couple combines both of their incomes on one tax return, that will increase the AGI (and therefore limit the amount of medical bills that can be deducted).

Another scenario relates to student loans. According to The Wall Street Journal, citing Pew Research data, there are 9 million borrowers on income-based repayment plans who only pay a percentage of their monthly income towards the outstanding balance. This data is pulled from tax returns — so, if you file jointly as a couple, your spouse’s income will come into play and will increase your student loan payment. It’s legal to file separately for this reason alone. One person WSJ interviewed said doing so reduced their monthly loan payment to $240 from $1,000.

If one member in the marriage owns a business, there are perks to filing separately. As of 2017, there is something known as QBI in the current tax law, or qualified business income. Eligible small business owners can deduct up to 20% of their income. There are thresholds of course — taxable income needs to be under $182,100 for individuals, or $364,200 for couples filing jointly.

The article also pointed out that potential MFS candidates should do their homework first before jumping ship. “MFS doesn’t treat two spouses like unmarried single filers, and there are pitfalls,” per the Wall Street Journal. This includes exclusion from a list of tax breaks, including lifetime learning credits and child and dependent care credits. And if you’re on Social Security or Medicare, it’s really important to analyze the pros and cons first as there’s a whole host of other issues that can pop up. Plus, state tax laws can affect how you should file federally, too, so that should be taken into consideration.

Make Your Money Work For You

For more information, the IRS has a helpful guide here.

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