Personal Finance

This just might be the worst tax-filing status to claim

Key Points
  • Married couples can opt to file jointly on one single tax return, or separately on two returns.
  • Couples filing separately may lose valuable tax credits and deductions. The IRS may also limit the amount they can contribute annually to a Roth IRA.
  • In 2016, the IRS received a total of 3.07 million returns claiming the “married filing separately” status.
Tony and Carmela Soprano.
Source: HBO | YouTube

If you and your estranged spouse are leading separate lives in separate homes, you might be thinking of filing your taxes that way, too.

Most married couples residing together under the same roof would see fit to file their income taxes on one joint return.

A number of couples have sought the alternative, which is to file under the status of "married filing separately." In this case, each spouse submits their own return and is responsible for their own tax liability.

In the 2016 tax year, the IRS received 3.07 million income tax returns using the "married filing separately" status.

Meanwhile, more than 54 million taxpayers submitted returns as "married filing jointly."

Be aware that just because you can turn in separate tax returns to the IRS doesn't mean that you should.

"Married filing separately isn't the same as just filing as a single taxpayer," said Robert Westley, CPA and member of the American Institute of CPA's personal financial specialist committee.

"Generally it's the least favorable filing status because it limits and can eliminate deductions and credits married couples would otherwise qualify for," he said.

Two situations

Tax collectors chase rich New Yorkers moving to low-tax states
Tax collectors chase rich New Yorkers moving to low-tax states

Here's one case in which it might make sense to file separately: You have an impending divorce and you've decided you don't trust the accuracy of your spouse's return.

Maybe your estranged spouse's income sources are fishy.

"This is like Carmela Soprano," said Westley, referring to the wife of fictitious TV mob boss Tony Soprano. "You want to file separately and detach your liability from your spouse's return."

Here, giving up the responsibility for the accuracy of your spouse's return trumps any tax savings you'd otherwise get from filing jointly, he said.

Filing separately might also make sense if one spouse has significant unreimbursed medical expenses.

Under the new tax law, filers who itemize on their returns may claim medical expenses only to the extent they exceed 7.5 percent of adjusted gross income for 2018.

"In this case, filing separately will lower their [adjusted gross income] and allow the spouse to achieve a greater deduction," said Westley.

Work with your tax preparer as you determine which status is best for you, because filing separately can come with plenty of disadvantages.

The breaks

Jamie Grill | Blend Images | Getty Images

Right out the gates, separate filers wind up with a lower standard deduction.

If you're married and filing separately, you have a standard deduction of $12,000 for 2018, the same as single taxpayers.

Married couples with joint returns are entitled to a $24,000 standard deduction.

Separate filers should also know that if one spouse takes itemized deductions, the other will be required to itemize, as well.

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This is a key sticking point because the Tax Cuts and Jobs Act has roughly doubled the standard deduction and put limits on itemized deductions.

As a result, people who might have itemized in previous tax years might be better off taking the standard deduction. For couples filing separately, that's not always an option.

"Spouses have to coordinate over whether they will both take the standard deduction or will they both itemize," said Westley.

Lost tax benefits

Protecting your finances during a divorce
Protecting your finances during a divorce

Here are a few tax breaks that may be out of reach for the "married filing separately" crowd.

For instance, the earned income tax credit is likely off the table.

This tax break is for lower income households and can max out $6,444 for households with three or more children for the 2018 tax year.

Couples in which each partner files a separate Form 1040 are also precluded from claiming the student loan interest deduction, which allows you to deduct up to $2,500 in interest paid during the year.

If you're married and you have kids, generally you can only claim the child and dependent care credit if you file a joint return or if you lived apart from your spouse during the last six months of the year.

The child and dependent care credit maxes out at $1,050 for one child under age 13 or $2,100 for two or more kids under 13.

Finally, if you're married and filing separately, you're unable to claim the lifetime learning credit and the American opportunity credit, according to the IRS.

Retirement savings

Jamie Grill | Getty Images

Filing separate returns can also put a crimp on your retirement accounts.

For instance, joint filers can save up to $6,000 in a Roth individual retirement account in 2019 as long as their modified adjusted gross income is below $193,000. Add $1,000 more if you're over age 50.

However, separate filers who lived with their spouse at any time in the year and who made more than $10,000 in MAGI can't contribute to a Roth IRA.

The restrictions aren't as tough for separate filers who've lived apart from their spouse the whole year. Those people can contribute the maximum $6,000 to the Roth IRA, plus $1,000 if over 50 — as long as their MAGI is below $122,000.

Separate filers may also be unable to fully deduct contributions to their traditional IRA.

"There are a lot of quirks, so it's important to go through and do your tax calculations," said Westley. "One piece can impact another."

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