In my practice and software, we see Married Filing Separately the most with couples that are in the midst of getting divorced. It is a tempting path because it keeps both spouses from having to negotiate and interact about their tax return.
However, there are some very compelling reasons to avoid this status if you can. Here are just a few:
- In most cases, joint filing offers tax savings because the two incomes are averaged. Therefore, both spouses qualify for a lower bracket that they wouldn’t have had otherwise if they were filing separately. For example, if one spouse has taxable income of $98K and the other has $11,000, filing separate gives a combined tax bill of $22,153, whereas if using the joint filing status, total tax is only $18,837.
- AGI can phase out your deductions faster if you have a high-income earner.
- Many deductions and credits are not available to married filing separate filers. Some of these include Child & Dependent Care Credit, Earned Income Credit, Student Loan Interest Deduction and American Opportunity Credit.
- Social Security income becomes taxable faster and, in some cases, it becomes taxable right away if you lived together.
- Some community property states require extra work on the return, regarding community income.
On the other hand, common reasons for electing Married Filing Separately are:
- Each spouse is responsible only for his or her own tax liability; when you file joint, each spouse is liable for the combined tax.
- If one spouse is cheating on their taxes, filing separately can keep the other spouse out of the possible audit for those years.
- If you are getting a refund, but your spouse owes back taxes, filing separately keeps your refund from being garnished.
When trying to evaluate the status that a return should use, it is often hard to use any rule of thumb. I recommend running a tax projection along with a simulator to examine what-if scenarios.
In most cases, filing jointly will still be the best option, but each case and client is unique.
You will need to prove your reasoning to clients. I find that clients often want to see a breakdown of how the different statuses affect them. This creates more work to complete a tax plan or tax return, and sometimes, it is significant.
I have a separate fee for this type of work and would recommend you do too. This IS NOT something that should just be part of the return preparation process. On average, I charge about $75 extra for this type of work. But, I have billed as much as $300 for certain situations.
Bottom line: be aware of the pros and cons, and if you have clients in a situation that might benefit from the analysis, get paid to do it!