09 May We’re married. Should we file taxes together or separately?

Q. We file our taxes jointly. Is there a rule of thumb for where we can decide if it might be better to file separately? I just don’t know if checking could be worth any savings.
— Taxpayers

A. It’s always smart to consider ways to potentially lower your tax liability.

But there is no “rule of thumb” to determine if it may be better to file separately as a married couple.

There can be an advantage when two spouses have differing income levels, said Laurie Wolfe, a certified financial planner and certified public accountant with Peapack Private Wealth Management in Summit.

She said if a lower-paid spouse has significant medical expenses, for example, they would be able to deduct a larger amount because of the lower limitation on that deduction, which is income-based.

“Be careful here though. The IRS says that you can only take a deduction for medical expenses if you actually paid the bill,” she said. “If you live in a non-community property state — which is most states — and make payment from a joint checking account, you can only take half the amount paid.”

Other benefits that people consider when deciding how to file are for non-tax reasons, Wolfe said.

“If you use your income level to determine your student loan payments, the lower income amount will result in a lower required loan payment,” she said.

Another reason may be that one spouse may want to limit their liability with respect to the other spouse’s potential tax errors or omissions, she said, noting that married filing jointly makes all the assets of a married couple subject to the tax liabilities of both spouses.

She said the rules vary if you did not live with your spouse during the tax year, but she’s assuming you did.

For separate returns, she said, your standard deduction, tax brackets and the capital loss deduction limitation are all half of the amount allowed to married filing joint filers.

“You cannot take the child and dependent care expense credit in most cases and the amount excludable from income under an employer’s dependent care spending account is limited to half that of married filers,” she said. “You cannot take the earned income credit, the adoption exclusion or credit, the education credits or the credit for the elderly or the disabled.”

You also can’t exclude interest income on U.S. savings bonds used for education expenses, she said.

You will include in income a greater percentage of any Social Security benefits at certain income levels, and the child and other dependents tax credits are reduced at half of the income levels of married filers.

“If your spouse itemizes their deductions, you must also itemize, even if the standard deduction is greater,” she said.

Plus, Wolfe said, you cannot take the special allowance to deduct losses generated by a rental real estate activity.

And, allowable contributions to Roth IRAs are significantly lower and the deductibility of traditional IRA contributions is severely limited, she said.

“There are many variables that you need to consider when deciding whether filing separately rather than jointly would benefit you,” she said. “Because of this I would recommend that you run the numbers both ways to see if there is a benefit.”

Make sure to compare your state income tax results as well because you may find that the state savings are larger than the added cost to file the federal return separately, she said, so look at the net benefit for both federal and state taxes.

“You can amend the prior three years of returns to go from married filing separately to married filing jointly, but not the other way around,” she said.

Consider consulting with a tax professional who can help you run the projections.

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This story was originally published on May 9, 2023.

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