2020 has been the year of the unexpected, and as a result, you may have decided to wait until the extended deadline of July 15 to file your 2019 tax return. Whether you have already filed or are still working on your return, you may wonder what the "Married, Filing Separately (MFS)" designation is all about. What does it mean, and does it make sense for you?
Let's Define Married Filing Separately
When it comes time to choose your filing status, you have a few options: Single, Head of Household, Married Filing Jointly, and Married Filing Separately. A couple who chooses to file under the MFS status will report their income, deductions, and credits on two separate individual tax returns.
There are some rules to follow for MFS. Each spouse is responsible for their own taxes and cannot be held accountable for the other spouse's tax liability nor any errors on their spouse's return. However, both spouses must coordinate on whether to take the standard deduction or to itemize. If one MFS spouse itemizes, then so must the other. Alternatively, if one takes the standard deduction, then both must take the standard deduction. The 2019 standard deduction for MFS is $12,200.
When Does It Make Sense?
Here are some situations when Married Filing Separately could be appropriate:
Itemized Expenses: If you have significant itemized deductions that are limited by your combined AGI, you may want to run the numbers for filing jointly versus separately. For example, MFS may make sense if the lower-earning spouse has significant medical expenses. Medical expenses that are more than 7.5% of your 2019 AGI are eligible to be deducted on Schedule A. Those expenses may not exceed 7.5% of your joint AGI but may meet that threshold for the lower-earning spouse; this threshold increases from 7.5% to 10% in 2020.
For example, assume your AGI is $50,000, your spouse's AGI is $200,000, and you have medical bills of $10,000. You would be eligible to deduct medical expenses greater than $3,750 if you file separately. File jointly and that number jumps to $18,750. Charitable gifts, also deductible on Schedule A, are limited based on the amount of your AGI.
Student Loans: Are you enrolled in an income-based payment plan for your student loans? If so, MFS will likely result in a lower monthly payment.
Debt obligations: The IRS typically allocates refunds toward back taxes, child support, or federal student loans if applicable. If one spouse doesn't want their refund going toward the other's back taxes, filing separately will ensure that doesn’t happen.
Divorce: If you are getting divorced, you may wish to keep your finances separate. However, if you are not living together and have dependents, you may be able to file as Head of Household instead.
Strictly looking at the tax brackets, those that file separately could owe more tax than if they filed jointly. For example, the 22% bracket is for income ranging between $40,126 to $85,525 for MFS versus $80,215 to $171,050 for MFJ. If you file separately, any income over $85,525 will be taxed at the next tax bracket (24%). However, if you file jointly, there is a much larger bucket to fill before you reach the 24% bracket.
The IRS encourages married couples to file jointly rather than separately by reducing or eliminating certain tax benefits. As a result, those that file separately may be impacted by the following:
- Traditional and Roth IRA contributions (Lower-income phase-out)
- Child tax credit (Lower-income phase-out)
- Child and dependent care tax credit (Eliminated)
- Student loan interest deduction (Eliminated)
- College tuition expenses deduction (Eliminated)
- American Opportunity and Lifetime Learning credit (Eliminated)
- Adoption credit (Eliminated)
- Earned income credit (Eliminated)
- Tax-free exclusion of U.S. bond interest (Eliminated)
- Tax-free exclusion of Social Security benefits (Eliminated)
- Elderly and disabled tax credit (Eliminated)
- The deduction of net capital losses (Reduced to $1,500 versus $3,000 MFJ)
Spouses that live in community property states must follow specific rules regarding allocating deductions and income when filing separately. Generally, earnings are split 50/50 regardless of who earned the income. Deductions are also shared equally.
You must use the same filing status for your Indiana income tax return as you use for your federal return. Until recently, Indiana residents who filed separately were not eligible for the Indiana state tax credit for 529 contributions. However, legislation has been passed, making the tax credit available to all tax filings statuses.
In many cases, Married Filing Separately results in few tax advantages, but each situation is different. Consult with a tax professional to weigh the pros and cons and determine what makes the most sense.
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