Should you file taxes separately or jointly

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As a general rule, you shouldn’t wait until the last second to file your tax return. It helps to plan and make certain decisions ahead of time to speed up the process. For one, if you’re married, you’ll need to decide whether you will file a joint or separate return. Typically, a joint return is the smartest move, since you can cash in on some valuable tax breaks. But sometimes it makes more sense to file on your own. A financial advisor can help you optimize the best tax strategy for your financial goals.

1. One of You Is Self-Employed

Whether you own a small business or work as a freelancer, your taxes will look very different from someone with a traditional 9-to-5 gig. First, you’re responsible for paying income tax on the money you earn. Then you also have to cover your Social Security and Medicare tax. For 2023, the self-employment tax rate is 15.3%.

Since your taxes aren’t being taken out during the year, you’re generally expected to make estimated quarterly payments (every three months) to cover the amount of tax you owe. If you haven’t been doing that or you underestimated what to set aside, that can add to your joint tax liability or take a big bite out of your refund. Splitting your taxes up may disqualify you from claiming certain credits or deductions. However, it can also minimize the amount of tax you’ll owe overall.

2. You’re Struggling With Student Loan Debt

Student loan debt in the U.S. has reached staggering proportions and approximately 70% of students leave school with loans. The average debt load hovers right around $30,000. For grads who are struggling to find their way in the job market, paying it down can be a challenge. Opting for an income-dependent repayment plan can offer some short-term relief but qualifying can be a challenge if you’re married.

If you file your return jointly, an income-based repayment plan will consider both you and your spouse’s income. This happens even if only one of you carries the responsibility of paying the debt. When you file separately, only your income is taken into account to determine what kind of payments you qualify for. Again, you’re sacrificing certain other tax benefits. If you don’t have kids and normally take the standard deduction, you may not feel as much of a pinch.

3. You Have a Lot of Itemized Deductions

Deductions can be a major boon at tax time, since they reduce your taxable income. But the IRS limits how much you can write off based on what you make. If one or both of you has a substantial amount of deductions to claim and there’s a pretty sizable gap in what you earn, filing separate returns can get you both the full amount of tax benefits.

For example, let’s say you experienced a serious illness or injury and you racked up some big out of pocket medical expenses. You can then deduct the amount that exceeds 7.5% of your adjusted gross income. If you earn $25,000 but your spouse earns $150,000, combining your income on your taxes is going to significantly reduce the tax benefit you’d get from the deduction, if you were able to claim it all. In this case, going solo would probably yield the bigger advantage.

Bottom Line

These are just some of the most important things married couples should keep in mind when planning their tax strategy. If you’re getting divorced or you’re worried about being liable for your spouse’s tax debt, filing separately may be a no-brainer. When you’re trying to decide what the best choice is, running the numbers can give you an idea of how much you stand to gain or lose either way.

When it comes to being married filing jointly or married filing separately, you’re almost always better off married filing jointly (MFJ), as many tax benefits aren’t available if you file separate returns. Ex: The most common credits and deductions are unavailable on separate returns, like:

• Earned Income Credit (EIC)
• Dependent care credit (for most filers)
• Tuition credits
• Student loan interest deduction
• Child care credit, unless you lived apart from July to December
• Adoption credit, unless you lived apart from July to December
• Hope and Lifetime Learning Credits
• Credit for the elderly or disabled, if you lived with your spouse at any time in the tax year
• Exclusion of interest on Series EE or I U.S. Savings Bonds used for higher education expenses
• Special allowance of $25,000 for real estate passive activities with active participation, if you lived together at any time in the tax year
• Standard deduction, if your spouse itemizes deductions

In addition, if you received Social Security or railroad retirement benefits and you lived with your spouse at any time in 2022, you might pay more tax on these benefits if you file separate returns than if you file a joint return.

Another reason to be married filing jointly and not married filing separately could be because of your state. If you live in a community property state, a joint return is more convenient, because you’ll avoid tax rules applying to married filing separately. These states are community property states:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

Also, if you file jointly, your standard deduction (if you don’t itemize) will be higher. This usually causes your taxable income and tax to be lower.

When would I want to be married filing separately over married filing jointly?

Married filing separately (MFS) might benefit you if you have to use the Alternative Minimum Tax (AMT) on a joint return. However, this is only true if only one spouse is liable on a separate return.

Some other reasons people file separate returns are:

• For non-tax reasons, such as maintaining separate finances
• Because the spouse with the lower income can qualify for tax deductions like a medical expense deduction only by filing a separate return
• For state tax reasons. Ex: Filing separate state returns will significantly cut your state tax bill, and your state makes you file using your federal filing status. Make sure that the gains you make on the state side are greater than the cost of separate returns on the federal side.

The best way to figure out whether married filing jointly or married filing separately will benefit you the most is to prepare your returns both ways. Then, choose the filing status with the lowest net balance due or refund.

If you choose married filing jointly, both of you can be held responsible for the tax and any interest or penalty due. One spouse might be held responsible for all the tax due — even if the other spouse earned all the income. If either spouse doesn’t agree to file jointly, then both spouses must file separately. There’s an exception if one of you qualifies for head of household status (HOH).

For a complete list of the special rules when filing as married filing separately vs married filing jointly, see page 22 of Publication 17 at https://www.irs.gov/.

With all this in mind, most married taxpayers file a joint return, both for the savings it provides and for convenience.

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