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Couples' Taxes: When to File Separately

Feb 10, 2021 6 min read Sheila Olson

Key takeaways

  • Itemized deductions can cause separation anxiety.
  • Tax liabilities might lead you to go separate ways.
  • Dividing returns could help conquer health care write-offs.

 

For most couples, filing together makes good financial sense—the tax code is structured to benefit married couples, fairly or not. According to the IRS, roughly 95% of all married couples file joint tax returns.

But even if you've joined your lives in every other way, sometimes love and money mix. So before you check the "married filing jointly" box on your 2020 return, see if any of these scenarios apply to you.

 

When should I file a joint tax return?

Several major deductions and tax credits generally apply only to couples who file jointly:

  • The earned income tax credit (EITC) for low to mid-income couples.
  • The child and dependent care credit.
  • Education-related credits and deductions including student loan interest deductions.

In addition, the child tax credit Opens in a new window phase-outs—the income level at which the credit gets smaller or disappears—favor married couples who file jointly: Their modified adjusted gross income (MAGI; i.e., AGI, or taxable income minus certain deductions) can be as high as $400,000 before the credit phases out; for everyone else, MAGI is capped at $200,000.

There's another important consideration as well: If you choose to file separate returns, each spouse must use the same method for deductions. If your spouse itemizes deductions, you must, too—and that can be costly.

For example, Jim and Ann are filing separate returns. Jim has itemized deductions totaling $16,500, well above the 2020 standard deduction of $12,400 for married filing separately status. Ann, however, only has itemized deductions of $2,500, well below the threshold. In this case, they lose $5,900 in deductions (the difference between their combined $18,900 in deductions and the $24,800 standard deduction for married couples filing jointly).

 

When should I file a separate tax return?

There are a number of scenarios when a married couple may want to consider filing separate tax returns.

 

One spouse has significant tax liabilities or risks

This is a difficult subject for many couples to discuss, but it's important to note that if one spouse enters the marriage owing back taxes, both partners become liable once they file a joint return.

Couples in which one or both partners are principals in a business where there are significant tax risks may also wish to file separately, because both spouses are on the hook for any tax liabilities incurred by the other if they file a joint return. Even though there are "innocent spouse relief" measures on the books, the IRS is very strict on when they can apply—and just saying, "he or she never told me about it" isn't enough to erase your liability.

In a similar vein, if one spouse owes unpaid child support or is behind on student loan payments, you run the risk of your tax refund being offset to cover these liabilities if you file a joint return. And if you're on an income-based student loan repayment plan, your payment will be based on your combined income if you file jointly.

 

One spouse has significant medical expenses

You're allowed to deduct medical expenses above 7.5% of your AGI (adjusted gross income). This is a steep threshold to meet for many high-income couples, but depending on your situation, you may come out ahead filing separately.

For example, Nathan makes $160,000 as a bank VP, and his wife, Sara, earns $40,000 as a kindergarten teacher. Last year, Sara underwent treatment for breast cancer that cost them $14,000 in out-of-pocket expenses. If they were to file jointly, with a combined AGI of $187,750, the couple would not be able to deduct any costs associated with her treatment.

If Nathan and Sara file separately, however, Sara could itemize and deduct most of her medical expenses, which could ultimately lower their overall tax liability.

Again, it's important to run the calculations both ways to determine whether other credits and deductions available to joint filers would offset the advantages itemizing medical expenses before deciding which way to file.

 

There are trust issues

A word of caution for all couples: If you suspect your spouse is hiding income or engaging in other behaviors that suggest tax evasion, you should give serious thought to filing separately. A joint tax return puts you, your income and your joint assets on the hook for any tax liabilities that result.

And if you believe divorce may be on the horizon, resist the knee-jerk reaction to file a joint return, and think through your options. Separate tax returns can make the financial separation process less complex and consequential.

 

What you can do next

Most couples come out ahead filing taxes jointly, and there's no rule on when separate returns make more sense. But everyone should run the numbers in both directions (and consider talking to a tax professional) before filing. Please consult your tax and legal advisors regarding your particular circumstances.

Footnotes

Sheila Olson is a Charlotte-based freelance writer specializing in investing, personal finance, entrepreneurship and retirement planning. She is a regular contributor at Investopedia and writes frequently for the banking and consumer credit industry.

 

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