Whether getting married, getting divorced, or trying to decide between the two, it doesn’t only change your life situation, but also changes your tax situation.
There are benefits to filing separate tax returns, or as we call it, Married Filing Separately (MFS). When you sign a return you are responsible for the accuracy of the return as well as the payment of the tax. You can eliminate joint liability if you file separately, meaning you are only responsible for your tax return and not the tax return filed by your spouse. Some couples can pay less tax by filing separately as well. Generally this happens when one spouse has deductions that are limited based on their adjusted gross income. If one spouse has significantly higher income that the other, the couple will most often pay less tax filing jointly.
Those are the benefits…so what are the disadvantages? Let me count the ways…
1. Lost credits such as Earned Income Credit, Education Credits, Adoption credit (with exception)
2. Lost Education Benefits like student loan interest deduction, tuition & fees deduction, and savings bond interest exclusion.
3. If one spouse itemizes (Schedule A), so must the other. No standard deduction can be taken by the spouse who does not itemize.
4. IRAs deductions and contributions can be limited or phased out at a measly $10,000 of adjusted gross income earned. Meaning if you make more than $10,000 in a year, Not only can you not contribute to your Roth IRA, you must remove the funds and place it in a non-deductible IRA or be penalized.
5. Capital losses are limited to $1,500 per spouse
6. The gain on the sale of your home is limited to $250,000 per spouse, rather than $500,000 jointly.
7. Passive losses such as rental real estate losses are limited to $12,500 per spouse, with lower phase-out thresholds. A passive loss by one spouse cannot be offset by passive income of the other spouse.
8. Some taxpayers may be subject to Alternative Minimum Tax when normally exempt.
When in doubt, contact your CPA to run the numbers for you.