File Taxes Jointly or Separately: Which tax status can save you the most money?
If you’re married, you may wonder whether you should prepare taxes as Married Filing Jointly (MFJ) or Married Filing Separately.
One of the first questions asked on a tax return is filing status. You can choose single, married filing jointly, married filing separately, head of household, or qualifying widow(er) with dependent child. Your status determines which deductions you are eligible for and which tax rate you end up paying. Which will save you more money?
In most cases, filing jointly is more convenient and offers the most benefits. However, some couples experience specific situations that make it better to file separately.
Advantages of Married Filing Jointly
Typically, Married Filing Jointly tax returns enjoy the most tax benefits.
First, couples filing jointly tend to pay lower tax rates. In 2020, the IRS only charged 10% tax the first $19,750 to couples filing jointly. By contrast, the IRS limited couples filing jointly to the first $9,875 in the 10% bracket. After those amounts, the rates increase based on income level. Plus, if either of you receives Social Security benefits, they are taxed at a more favorable rate than if you filed separately.
Second, joint filings enjoy the most generous standard deduction. The standard deduction was $24,400 for filing jointly in 2019. On the other hand, filing separately only provided a $12,200 standard deduction between 2 people, only half the benefit. The higher your deductions, the lower your taxable income will be.
Finally, filing jointly provides full access to some valuable tax credits that filing separately does not:
- Earned Income Tax Credit offsets Social Security taxes paid
- Child and Dependent Care Tax Credit for the cost of caregiving services for a child or dependent spouse
- American Opportunity and Lifetime Learning Education Tax Credit for education expenses first four years of higher education.
- Lifetime Learning Credit for tuition and education expenses when enrolled in an eligible educational institution.
- Savers Tax Credit for making contributions to a retirement account
- Adoption expenses like court fees when legally adopting a child
If you were married on or before December 31, you could file as Married Filing Jointly.
Disadvantages of Married Filing Jointly
When filing jointly, the IRS may hold both spouses responsible for unpaid taxes, interest, or penalties. They might place full tax responsibility on one spouse even if the other spouse earned all of the income.
In situations of disagreement, then the IRS requires both spouses to file separately.
Another circumstance in which filing jointly may not be advantageous is if a spouse qualifies to file for head of household status (HOH). You can file for HOH if there is a claimable dependent child, stepchild, or foster child who resides with you for more than half of the year.
Circumstances When Couples Should File Separately
The reason Congress created Married Filing Separately was primarily to benefit legally separated or divorced spouses. It offered them an opportunity to avoid tax and legal complications.
In other situations, it can be more worthwhile to file separately:
- You or your spouse owes the IRS unpaid taxes or child support. If you file a joint return, the IRS will allocate your refund to paying the taxes due.
- Either spouse pays student loan payments based on their income. Filing jointly with a higher combined income may trigger higher charges.
- Your spouse is not transparent about their tax situation, and you wish to protect yourself from tax liability.
- Either spouse tallied significant medical expenses and has a lower income than the other spouse.
- Both spouses are high-income earners and qualify for significant itemized deductions.
- One spouse but not the other is subject to Alternative Minimum Tax (AMT).
- Spouses keep separate finances.
- The other spouse refuses to file a tax return.
Deciding Which Status to Use
When deciding which filing status to use, make sure to get a full picture of your situation. You could prepare your taxes two ways, once using Married Filing Jointly and once using Married Filing Separately, and see which one offers you the best outcome. The IRS permits choosing the tax filing that best benefits you.
If you live in a state that observes community property laws, you may not have the option to file separately. Community property means all real or personal property belongs to both partners in the marriage, thus community property. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states.
Alternatively, if you’re still unsure which filing status to use, contact a CPA (certified public accountant) or Enrolled Agent (federally-licensed tax practitioner) for advice. They have the expertise that will help you determine what works best for your situation.