iStock
There are several reasons why married couples file taxes separately, and one of the most compelling is that it offers some financial protection against the Internal Revenue Service.
When you don’t want to be liable for your partner’s tax bill, choosing the married-filing-separately status means the IRS won’t apply your refund to your spouse’s balance due, according to the Silicon Valley-based financial software company Intuit.
Of course, there are tradeoffs. The tax code generally rewards joint filers and separate filers may lose other tax breaks. They need to look at their return holistically before deciding to switch, experts say.
Married filing separately involves two individual returns, each reporting their own income, deductions and credits, and it may invite more scrutiny.
“The IRS seems to have the viewpoint that if someone is filing separately, they’re doing something shady,” said certified financial planner John Loyd, owner of The Wealth Planner in Fort Worth, Texas.
Of the 150.3 million tax returns filed in 2016, 3.07 million belonged to twosomes who filed separately, according to the IRS’s published statistics.
Those who report individual income and expenses on separate tax returns have to agree to either both itemize expenses or both use the standard deduction. If they had similar incomes, filing separately and using their various deductions or medical expenses likely helps them save taxes, according to Intuit.
The IRS limits or blocks write-offs for separate filers including the student loan interest deduction, education tax credits and more.
For example, most separate filers can’t make Roth individual retirement account contributions because the IRS slashes the modified adjusted gross income limit to $10,000.
“As a general rule, I really try to avoid filing separately,” Loyd from The Wealth Planner said. “You don’t want the spotlight shining on your tax return.”
If you’re on an income-based student loan repayment plan, it could make sense to file taxes separately because earnings usually dictate how much your payment will be.
Filing jointly could trigger higher payments, Loyd told CNBC, but you should weigh the other trade-offs before filing separately to lower tax bills.
If you have high medical bills, you may want to file separately to reduce adjusted gross income, according to Marianela Collado, a CFP and CPA at Tobias Financial Advisors in Plantation, Florida.
With itemized deductions, she said you may claim a tax break for unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income.
For example, with an adjusted gross income of $100,000, you can write off eligible costs exceeding $7,500. The lower your income, the easier it is to cross that threshold.
However, spouses filing separately must either itemize or take the standard deduction. They can’t pick and choose different strategies.
Another common reason to file taxes separately involves financial infidelity — when couples with combined finances lie to each other about money. For example, one partner may hide debts in a separate account that the other partner is unaware of. Another common example is when one partner spends big without discussing it with their partner.
Another example involves a couple that separates and one can’t count on the other to file taxes accurately or on time.
The IRS won’t apply your refund to your spouse’s balance due. For example, separate returns make sense to prevent the IRS from seizing a spouse’s tax refund when the other has fallen behind on child support payments.
Signing a joint return may create liability for mistakes or tax fraud and there’s no statute of limitations for the IRS to come after fraud — more risk for divorcing couples, said Monica Dwyer, a CFP, vice president and wealth advisor at Harvest Financial Advisors in West Chester, Ohio.
“You’re putting yourself on the line for that information,” she said.
