Many US taxpayers are in the process of gathering the documents to file their tax return before the April 18, 2022 deadline. Unlike the last two years, the deadline has not been extended for 2022. For those who have already started on their taxes, you may wonder what that “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 their own, individual tax return. Each spouse is responsible for their own taxes and cannot be held accountable for any tax liability of their spouse, nor any errors on spouse’s return. However, one area both spouses must coordinate on is 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 2021 standard deduction for MFS is $12,550.
When Does It Make Sense?
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 could make sense if the lower-earning spouse has significant medical expenses. Medical expenses that are more than 7.5% of your 2021 AGI are eligible to be deducted on Schedule A. 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 the refund is received.
Divorce: If you are in the process of 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 than if filing jointly. For example, the 2021 22% bracket is for income ranging between $40,526 - $86,375 for MFS versus $81,051 - $172,750 for MFJ. If you file separately, any income over $86,375 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 eliminate or reduce the following tax breaks:
- 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)
- Tax-free exclusion of U.S. bond interest (Eliminated)
- Tax-free exclusion of Social Security benefits (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.
Until recently, Indiana residents who filed separately were not eligible for the Indiana state tax credit for 529 contributions. However, legislation has now been passed that makes the tax credit is 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 for you.
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