Tax season is underway! But, before you file…have you sat down to consider what filing status is best for you? Many couples ask us if they should file their taxes as married filing jointly (MFJ) or married filing separately (MFS). The answer: It depends! When you file jointly, you are eligible for certain credits and deductions that are not allowed for those those who file separately. That’s a good thing! However, if you are looking for ways to separate your income and tax liabilities, you may want to consider filing separately.
Let’s break each of these down.
What are the benefits of filing jointly?
The biggest benefit are the credits and deductions available to those who file jointly as opposed to those who file separately. I also want to take a moment to point out that the “marriage penalty” that once existed in full force has been greatly reduced since the Tax Cuts and Jobs Act was signed into law in 2017. Now you’ll notice the married joint tax brackets are simply double the single tax brackets, except for those couples in the 37% tax bracket (taxable income of $693,750 or more for 2023). The highest tax bracket starts sooner (proportionally) for joint filers than those who filing single. However, for most filers, the “marriage penalty” from a federal tax bracket perspective no long exists. Yay!
What tax credits and deductions are negatively impacted by filing separately?
Here’s a list of credits and deductions that are unavailable or reduced to married couples filing separately:
How are credits and deductions calculated based on filing jointly or separately?
Child and Dependent Care Credit: This credit applies to expenses related to the care, well-being, and protection of qualifying dependents that would enable you and your spouse to work. The credit will be a percentage (determined by your AGI) of the amount you paid to a care provider for the care of your dependent. The credit is partially refundable, meaning you can still receive it if you owe no federal income tax.
The limit or exclusion under an employer’s dependent care assistance program is $2,500 for couples MFS (compared to $5,000 for MFJ) for 2023. If you have children with regular daycare expenses, this could help relieve your financial situation more if you use the filing status married filing jointly.
Earned Income Credit: This credit applies to low- to moderate-income workers to help reduce the taxes you owe or increase your refund. Generally, you can’t be married filing separately and claim the earned income credit unless you qualify for a certain exemption.
Adoption Expense Credit: Adoption expenses qualify for a tax credit for expenses paid to adopt an eligible child and an exclusion from income for employer-provided adoption assistance. The adoption expense credit is a nonrefundable credit meaning it can’t be used to increase your refund and only can be used to decrease your tax liability, however, it can be carried forward for up to five years with a maximum amount of $15,950 per child in 2023. The adoption expense credit is unavailable to married couples filing separately.
Education Credits: There are two education credits allowed for those who file jointly. The American opportunity tax credit with a maximum benefit of $2,500 per eligible student. The Lifetime learning credit has a maximum benefit of up to $2,000 per return. Neither of the education expense credits are available to married couples filing separately.
Student Loan Interest Deduction: This deduction allows you to deduct the lesser of $2,500 or the amount you’ve paid in interest on a qualified student loan during the year. It is unable for those who file separately.
What are the benefits of filing separately?
A big benefit to filing separately is to report an individuals income lower. For example, as federal student loans plan to start back up in 2023, many borrowers may want to reduce their income as much as possible to help lower their monthly payments on the IDR (income-driven repayment) plans.
You may also want to consider filing separately if one partner had large medical bills. Medical bills may be deducted if you itemize your deductions. However, you must have over the 7.5% threshold of your adjusted gross income in medical bills just to claim any dollars! Therefore, it might be easier to claim this deduction when you file separately.
Lastly, you may want to consider filing separately if one spouse is liable for tax liens and other issues that the other spouse does not wish to be included on. Also, when it comes to shielding a spouse from wrongdoings of another spouse, filing separately may make sense. A pending divorce or separately can also be good reason to file separately.
What other aspects of filing separately should you be aware of?
There are just a few more items to consider before filing separately. First, if you select benefits with your employer that cover your household (for instance, one of your covers the entire family for medical insurance) you may only be able to fund your medical savings account based on one individual instead of two. This is similar to what happens with the employer provided dependent care flex spending account that we discussed earlier.
You need to also be aware that you both must elect the same deduction status if you file separately. For example, if one of you itemizes their deductions on Schedule A, the other spouse must also itemize. You cannot have one take the standard deduction while the other partner claims itemized deductions.
If you have a dependent, only one partner can claim the dependent on their tax return when filing separately.
See! I told you… it really depends on your unique situation to know what filing status is best for you. More often than not, filing jointly is more advantageous from a tax perspective. However, there are many important considerations a couple must consider to know if filing separately is best. This is why we encourage all of our clients to speak with both a financial advisor (hey, that’s us!) and your tax professional to see what is most beneficial for you.
If you have further questions or concerns regarding your future tax planning, see our financial planning experts and schedule a free 30 minute consultation with us with any questions or concerns about how these changes could affect you!
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.