If you are married, you have a choice of how to file your tax return. The obvious, and usually most beneficial, filing status is married filing joint. However, if you and your spouse lived apart the last six months of the year and you have a qualifying person who qualifies you for head of household status, you may select to file as head of household. Your tax bill will be considerably cheaper.
Married filing separately is usually the most expensive filing method tax wise. But sometimes this method may prove to be a money and stress saver, especially if your spouse is something of an outlaw. By using this filing status, you can ensure that your tax issues do not comingle with those of your spouse and you avoid IRS collection problems, liens and levies by keeping your finances and taxes separate from those of your spouse. If you live in a community property state, youll likely need to do more to protect yourself than resorting to this filing status.
Married filing separate usually results in higher tax liabilities. Heres why:
1. In general, the tax rate for married filing separately is higher, rendering a higher total tax bite. I run the numbers both ways for my clients to determine if married filing separately would be advantageous and every once in a great while it shakes out that way, but not very often.
2. You do not enjoy the following tax credits: earned income credit, child and dependent care credit, education credits, exclusion or credit for adoption expenses. If you lived with your spouse at any time during the tax year, you cannot take the credit for the elderly or disabled.
3. If your spouse itemizes deductions you must also itemize deductions. Check it out: If your spouse owns the home in which you both reside, he or she may possibly deduct the mortgage interest, property taxes, all the big-ticket items, leaving you with considerably less than the standard deduction to reduce your taxable income. That could leave a mark!
4. If you own rental real estate, you enjoy a special allowance of $25,000 a year in losses (special rules and income limits apply) if you use married filing joint status. But you dont get this special allowance if you are filing separately. Consider the tax bite this creates: You do not lose the losses completely; they can be carried forward to offset passive income in future years or go against a profit in the year of disposition of the rental asset.
5. Many of your allowances and deductions are slashed in half. The capital loss deduction is reduced from $3,000 to $1,500. The first time home-buyer credit is allowed at $4,000 rather than $8,000. Your exemption amount for figuring the alternative minimum tax is half what it would be on a joint return. And the child credit and retirement savings contribution credits are also cut in half--your spouse, of course, gets the other half, if he or she qualifies.
6. You dont get the deduction for student loan interest.
7. If you lived with your spouse at any time during the year, you will have to include a higher percentage of Social Security benefits or railroad retirement benefits in your income.
Because your adjusted gross income (AGI) will likely be lower under married filing separate, you may enjoy a larger deduction for expenses that are tied to the AGI like medical expenses, employee business expenses, etc.
If you wish, you can amend a return that was filed separately, going back three years. However, once you file a joint return, you cannot go back and amend it to file separately. There is one exception to this rule which applies to surviving spouses.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know, available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.