In our last post, we reviewed the main advantages and disadvantages of joint tax returns for married couples. This post will focus on when a married couple should consider filing separately, and special considerations if they reside in a community property state.
When to consider filing separately
Following are the main reasons that married individuals file separately:
- High income. Where both spouses have high earnings, their combined income may place them in a higher tax bracket.
- Debts. If a spouse owes back taxes, must pay child support, or has overdue student loans, filing a joint tax return could result in the IRS offsetting the other spouse’s tax refund to pay the debt.
- Marriage problems. If a couple is going through a divorce, contemplating one, and/or one spouse is concerned about the other not reporting all of their income, they might wish to avoid liability for their spouse’s tax reporting and file their own return.
- Income-based student loan repayment. Where one or both of the spouses is on an income-based student loan repayment schedule, the couple should have their accountant do some calculations for them. If the tax savings for filing jointly does not exceed the higher loan payments that will result from reporting their combined income, they should consider filing separately (but understand that lower payments will extend the period of the loan).
- Itemized deductions. Sometimes filing separately is beneficial if one or both of the spouses has a lot of itemized deductions subject to an adjusted gross income (AGI) “floor,” such as medical expenses (where the deduction is limited to 7.5% of a taxpayer’s AGI) and employee business expenses (where the deduction is limited to 2% of the AGI).
Filing separately in a community property state
For married couples and registered domestic partners who file separately and reside in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), each partner must report their separate income and half of the community income on their respective tax returns.
When filing separately, married couples should be certain to have an agreement regarding how they will calculate the reporting of their income and related expenses, and whether they will be itemizing expenses or utilizing the standard deduction. A Form 8958 must be attached to each Form 1040, which provides the IRS with an itemized list of how the allocation of each spouse’s wages, interest, dividends, capital gains and losses, deductions, and credits was made.
One or the other spouse may claim the exemption for each dependent child or children, but they may not each claim half of an exemption for a single person. For more on this topic, see IRS Publication 555.
Changing your filing status
When you file a joint return, you cannot switch to a separate return after the filing due date. If you file separate returns, however – as a single, head of household, or as married filing separately, you can usually change to a joint return at any time within three years of the filing due date (not including extensions).
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