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Should you elect married filing separately on your tax returns? The truth is only about 2% of married couples do so. For a select few, however, the election can be quite beneficial.

Most married couples can and should file jointly. The IRS itself states that “in almost all instances, if you file separate returns, you will pay more combined federal tax than you would with a joint return.”

This is commonly true because couples that file separately lose many tax breaks and incentives awarded to couples who file jointly. These can include childcare or dependent care credit, adoption credit, earned income credit, education expense credit, and a deduction for student loan interest. Cut in half are the exemption amount for calculating the alternative minimum tax (AMT), child tax credit, retirement savings contributions credit, and the capital loss deduction limit. Plus, if your spouse itemizes deductions, you can’t claim a standard deduction (if you do, your basic standard deduction is half the amount allowed on a joint return).

That being said, there was an uptick in interest in the married-filing-separately election during the pandemic. Why? As Forbes’ Kelly Phillips Erb points out, “the math occasionally worked out to provide additional benefits (like stimulus checks) for couples who file separately.” But that added benefit is lost now that stimulus money has dried up. So, we return to the tried-and-true reasons a married couple may want to consider filing separately.

A primary reason: Equally high incomes. Since tax rates increase as income rises, filing jointly can force a couple into an uncomfortably higher tax bracket than if they had filed separately. Quite often, the tax benefits of filing jointly outweigh this con, but not in every case. As the IRS admits, “If both you and your spouse have income, you should usually figure your tax on both a joint return and separate returns (using the filing status of married filing separately) to see which gives the two of you the lower combined tax.”

A tax break enacted in 2017 incentivized business owners to use the married filing separately election. Qualified business income (QBI)allows eligible business owners to deduct up to a full 20% of their business income on their individual returns if their taxable income is under $182,100 (filing separately) or $364,200 (for joint filers). This gives equally high-earning couples an extra reason to consider filing separately if at least one is a business owner.

Other reasons married filing separately may be the best election for you could involve:

  • Student loans—Particularly if a spouse with hefty student loans is eligible for an income-based repayment plan.
  • Medical bills—When one spouse has significant medical (or other) expenses and little income.
  • Physical or legal separation—Married couples who live apart or are separated (but not legally divorced) will want to weigh the pros and cons.
  • Other complicated matters include protection from the other spouse’s debt, community property issues, or privacy concerns.

It’s important to note here that federal income tax law determines income at the state level; and that Texas is a community property state. Absent an advanced written agreement, in Texas, community income/expenses are reported 50% on each spouse’s separate return. Getting around this, if possible, requires added paperwork and consideration

As with most tax considerations, the decision isn’t black-and-white, so weigh your options carefully and re-evaluate regularly. Feel free to contact us with questions.

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