The Bureau of Labor Statistics reports that in 2019, nearly half of U.S. marriages are composed of dual-career couples. When it comes to couples with children, that number rises to 63 percent. With children or without, the benefits of a dual-career household – including greater financial stability and tax breaks – are significant. Even so, situations exist where the best option is to file your taxes separately, rather than jointly.
Married Filing Jointly (MFJ)
Lower tax bracket: If one spouse's income is significantly higher than the other (or vice versa) in 2020, by filing jointly, you may qualify for a lower federal income tax bracket than if you file separately. A lower tax bracket means your income is subject to a lower tax rate. Consequently, you might receive a refund you would not receive if you adopt the married filing single filing status.
Tax credits and deductions: Many tax credits and deductions are available to those couples who file a joint return in 2020, but not to those couples who file separately. These credits and deductions include the child and dependent care credit, earned income credit, adoption expenses credit, education credit and premium tax credit. For a couple who takes a standard deduction and files jointly, your standard deduction is $24,800. If you file separately, the deduction is $12,400.
Capital loss deduction: When filing a joint return in 2020, the maximum capital loss deduction you can claim is $3,000. In contrast, when you file separately, the limit is just $1,500. The additional $1,500 deduction you receive when filing jointly may amount to a sizable reduction in your overall tax bill.
Retirement account contributions deduction: Your modified AGI affects the amount of your deduction for your retirement plan at work. If you file jointly in 2020, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is more than $103,000 but less than $123,000. However, if you file separately, your IRA contribution is phased out when your adjusted gross income is $10,000 or less.
Convenience and expense: Filing one joint return as a married couple is infinitely more simple and less costly than filing two separate returns. One reason is that if one spouse itemizes deductions, the other spouse must do so. What's more, your tax preparation fees and time commitment to the process double as well.
Married Filing Separately
Medical bills deduction: You can deduct medical expenses if they exceed 7.5 percent of your adjusted gross income. So, if you have a lower income than your spouse, filing separately may allow you to take a deduction for high out-of-pocket medical bills.
For instance, assume your combined adjusted gross income is $235,000 and your personal out-of-pocket medical expenses total $11,500, but your spouse had none. In this case, you couldn't deduct the expenses if you file jointly since the expenses are less than 7.5 percent of your adjusted gross income. If, however, your personal income is $32,000, you could deduct the expenses if you file a separate return.
Tax liabilities: When you select the married filing jointly option, each spouse is responsible for the tax bill of the other partner. You and your spouse receive the many benefits of this filing status, such as tax credits and deductions, but you share the tax obligations as well. In the event you anticipate a divorce, even a separation, odds are you're not comfortable with that prospect.
Child support liability: If your spouse owes child support, filing separately can prevent tax refund seizure or the IRS from taking your tax refund to cover the arrears. By filing separately, can protect your tax refund from your partner's creditor claims.
Separate property and assets: If the value of your assets is considerably greater than that of your partner and you want to hold those assets separately, it's essential that you use the married filing separately tax status. The married filing separately status might also be preferable if you have assets you want to pass to children of a prior marriage.
Pass-through deduction phaseout: When either spouse receives qualified business income, that partner might benefit from the associated pass-through deduction, which may allow that business owner to deduct 20 percent of his income. For instance, if your income is greater than that of your spouse and his income is under $157,500, the majority of which is qualified business income, you may lower your overall tax liability by filing separately.
Making Your Decision
The benefits of a dual-career household – including greater financial stability and tax breaks – are significant. Even so, a situation may exist when adopting the married filing separately tax status is the best option. Before you prepare your 2020 tax return, consider both options – married filing jointly and married filing separately – to decide which is best for your family.
- Bureau of Labor Statistics: Employment Characteristics of Families
- Internal Revenue Service: 26 CFR 601.602: Tax forms and instructions
- Internal Revenue Service: Earned Income Tax Credit (EITC)
- Internal Revenue Service: Topic No. 607 Adoption Credit and Adoption Assistance Programs
- Internal Revenue Service: American Opportunity Tax Credit
- Internal Revenue Service: Topic No. 602 Child and Dependent Care Credit English
- Internal Revenue Servie: The Premium Tax Credit - The Basics
- U.S. News and World Report: The Pros and Cons of Standard vs. Itemized Tax Deductions
- U.S. News and World Report: 3 Tax-Deductible Investment Expenses
- Internal Revenue Service: 2020 IRA Contribution and Deduction Limits Effect of Modified AGI on Deductible Contributions If You ARE Covered by a Retirement Plan at Work
- Internal Revenue Service: Publication 590-A (2019), Contributions to Individual Retirement Arrangements (IRAs)
- Internal Revenue Service: Topic No. 502 Medical and Dental Expenses
- Investopedia: Happily Married? File Taxes Separately!
- NOLO.com: Can the IRS take my tax refund for child support arrears?
- Internal Revenue Service: Publication 555 (Rev. March 2020) Cat. No. 15103C Community Property
- U.S. News and World Report: 5 Small Business Tax Deductions
- Internal Revenue Service: Facts About the Qualified Business Income Deduction
- Investopedia: Married Filing Separately
- Internal Revenue Service: IRS provides tax inflation adjustments for tax year 2020
- Internal Revenue Service (IRS). "Taxpayers Should Include Tax Plans in Their Wedding Plans." Accessed Aug 13, 2020.
- Internal Revenue Service (IRS). "Publication 17: Tax Guide 2019," Pages 22-23. Accessed Aug 13, 2020.
- Internal Revenue Service. "Publication 502 (2019), Medical and Dental Expenses: Separate Returns." Accessed Aug 13, 2020.
- Internal Revenue Service (IRS). "About Publication 555: Community Property." Accessed Aug 13, 2020.
- Internal Revenue Service (IRS). "About Form 8379, Injured Spouse Allocation." Accessed Aug 13, 2020.
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.