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What Are The Benefits And Consequences Of Filing Married But Separate?

When you are legally married to someone, you lose the ability to file a federal tax return as a single taxpayer to the IRS. Married taxpayer couples elect to file a joint return around 95% of the time. However, there are some circumstances that a married person would want to file a separate return. You can be sure that there are significant consequences to making that election.

Both before and after the passage of the Tax Cuts and Jobs Act of 2017, the filing status of married but separate continues to have the highest taxable rates when compared to all other filing statuses. Here are the tax tables for Form 1040 filers in 2018:

FOR MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES:

  • If taxable income is not over $19,050, then the tax is 10% of taxable income.
  • If taxable income is over $19,050 but not over $77,400, then the tax is $1,905 plus 12% of the excess over $19,500.
  • If taxable income is over $77,400 but not over $165,000, then the tax is $8,907 plus 22% of the excess over $77,400
  • If taxable income is over $165,000 but not over $315,000, then the tax is $28,179 plus 24% of the excess over $165,000
  • If taxable income is over $315,000 but not over $400,000, then the tax is $64,179 plus 32% of the excess over $315,000.
  • If taxable income is over $400,000 but not over $600,000, then the tax is $91,379 plus 35% of the excess over $400,000
  • If taxable income is over $600,000, then the tax is$161,379 plus 37% of the excess over $600,000

FOR SINGLE INDIVIDUALS (OTHER THAN HEADS OF HOUSEHOLDS AND SURVIVING SPOUSES):

  • If taxable income is not over $9,525, then the tax is 10% of taxable income.
  • If taxable income is over $9,525 but not over $38,700, then the tax is $952.50 plus 12% of the excess over $9,525.
  • If taxable income is over $38,700 but not over $82,500, then the tax is $4,453.50 plus 22% of the excess over $38,700.
  • If taxable income is over $82,500 but not over $157,500, then the tax is $14,089.50 plus 24% of the excess over $82,500.
  • If taxable income is over $157,500 but not over $200,000, then the tax is $32,089.50 plus 32% of the excess over $157,000.
  • If taxable income is over $200,000 but not over $500,000, then the tax is $45,689.50 plus 35% of the excess over $200,000.
  • If taxable income is over $500,000, then the tax is $150,689.50 plus 37% of the excess over $500,000.

FOR HEADS OF HOUSEHOLDS:

  • If taxable income is not over $13,600, then the tax is 10% of taxable income.
  • If taxable income is over $13,600 but not over $51,800, then the tax is $1,360 plus 12% of the excess over $13,600.
  • If taxable income is over $51,800 but not over $82,500, then the tax is $5,944 plus 22% of the excess over $51,800.
  • If taxable income is over $82,500 but not over $157,500, then the tax is $12,698 plus 24% of the excess over $82,500.
  • If taxable income is over $157,500 but not over $200,000, then the tax is $30,698 plus 32% of the excess over $157,500.
  • If taxable income is over $200,000 but not over $500,000, then the tax is $44,298 plus 35% of the excess over $200,000.
  • If taxable income is over $500,000, then the tax is $149,298 plus 37% of the excess over $500,000.

FOR MARRIED FILING SEPARATELY:

  • If taxable income is not over $9,525, then the tax is 10% of taxable income.
  • If taxable income is over $9,525 but not over $38,700, then the tax is $952.50 plus 12% of the excess over $9,525.
  • If taxable income is over $38,700 but not over $82,500, then the tax is $4,453.50 plus 22% of the excess over $38,700.
  • If taxable income is over $82,500 but not over $157,500, then the tax is $14,089.50 plus 24% of the excess over $82,500.
  • If taxable income is over $157,500 but not over $200,000, then the tax is $32,089.50 plus 32% of the excess over $157,500.
  • If taxable income is over $200,000 but not over $300,000, then the tax is $45,689.50 plus 35% of the excess over $200,000.
  • If taxable income is over $300,000, then the tax is $80,689.50 plus 37% of the excess over $300,000.

If you are married, you are prohibited from filing as a single taxpayer. You must either file jointly with your spouse, file married but separate, or file as head of household. To qualify as head of household, you must be "considered unmarried" (even if legally married) on the last day of the tax year, meaning that you meet ALL of the following tests:

  • You file a separate return from your spouse.
  • You paid more than half the cost of keeping up your home for the tax year.
  • Your spouse didn't live in your home during the last six months of the tax year.
  • Your home was the main home of your child, stepchild or foster child for more than half the year.
  • You are able to claim an exemption for your child.

It is not necessary for the spouses to be divorced, going through divorce, or even be legally separated for head of household filing status provided that the tests are met. If your spouse lived with you during the last six months of the year or you have no dependents, then you will not be able to file as head of household.

Despite the increased tax rates, there may be several reasons why you would want to file as married but separate instead of filing jointly:

  • One of the Spouses Is Self-Employed: The spouse in business for himself or herself is likely subject to the self-employment tax of 15.3%. This tax is intended to cover the spouse's share and the hypothetical employer's share of the Social Security and Medicare tax that would be paid if that spouse was someone's employee. Since there is no income withholding, the self-employed spouse is expected to make estimated quarterly tax payments to the IRS to cover this amount. If the spouse either underestimated the payments or failed to make them, then there could be a substantial tax bill at the end of the year that can take a bite out of both spouses who file a joint return. The employee spouse might opt to simply pay the higher tax rate and suffer lost deductions and credits from filing married but separately to preserve some type of tax return for himself or herself.
  • One of the Spouse Has Plenty of Itemized Deductions: If there is an appreciable income gap between the married couple where one spouse would do much better by itemizing deductions separately than the other spouse, then it is possible that the two combined separate but itemized returns will net a lower tax liability than a joint return. BEWARE: If one spouse itemizes, the other spouse cannot take the standard deduction, and vice versa. 26 U.S.C. §63(c)(6)(A).
  • Spouse Intends To Make A Dishonest or Fraudulent Report of Income or Owes Money: If your spouse is make false statements regarding his or her income on a joint return and the Internal Revenue Service determines after examination that there is a substantial tax deficiency with penalties and interest, then both spouses will be on the hook. Furthermore, one spouse may discover that the other spouse has a significant past-due obligation and that a governmental authority seized the joint refund to satisfy the obligation (e.g. past due child support). It is possible for the honest spouse to file Form 8379 (Injured Spouse Allocation) to get back their share of a joint refund or file Form 8857 (Innocent Spouse Relief) to request abatement from tax liability when the spouse or former spouse should be held accountable. However, these processes can take a considerable amount of time and paperwork to resolve. The honest spouse might simply elect to file as married but separately to avoid these serious problems altogether.
  • Spouse Refuses to File Joint Return: If your spouse doesn't agree to file a joint tax return, then you will have no choice but to file as married but separately (unless you qualify to file as head of household).
  • Spouse is Nonresident Alien: A married couple generally cannot file a joint return if either spouse is a nonresident alien at any time during the tax year, UNLESS the nonresident spouse is married to a U.S. citizen or resident alien at the end of the tax year.

If you elect married filing separately, there are a number of special rules that apply to the various tax deductions and credits you would otherwise qualify for:

  • Your exemption amount for computing the alternative minimum tax is one-half what is allowed on a joint return. 26 U.S.C §55(b)(1)(C).
  • You can only exclude up to $2,500 (as opposed to $5,000 on a joint return) of payments made under an employer's dependent care assistance program. 26 U.S.C. §129(a)(2)(A).
  • You cannot claim the earned income credit. 26 U.S.C. §32(d).
  • You cannot claim the exclusion or credit for adoption expenses. 26 U.S.C. §23(f)(1).
  • You cannot take the American Opportunity credit or the Lifetime Learning credit. 26 U.S.C. §25A(g)6).
  • You cannot take the deduction for student loan interest. 26 U.S.C. §221(e)(2).
  • You cannot exclude interest income from qualified U.S. savings bonds you used for higher education expenses. 26 U.S.C §135(d).
  • You cannot claim the credit for the elderly or disabled IF you lived with your spouse at any time during the tax year. 26 U.S.C. §22(e)(1).
  • You must include 85% of any Social Security benefits or railroad retirement benefits in taxable income IF you lived with your spouse at any time during the tax year (as opposed to including 0% or 50% of benefits into taxable income on a joint return). 26 U.S.C. §86(c)(1)(C).
  • The maximum income levels required to qualify for the child tax credit are reduced by more than half. 26 U.S.C. §24(b)(2)(C).
  • The maximum income levels required to qualify for the retirement savings contributions credit are reduced in half UNLESS they lived apart at all times during the tax year. 26 U.S.C. §219(g)(3)(B)(iii).
  • Your capital loss deduction limit is $1,500 (as opposed to $3,000 on a joint return). 26 U.S.C. §1211(b)(1).
  • If you are able to claim the standard deduction (because your spouse did not itemize), then your basic standard deduction is half the amount allowed on a joint return. 26 U.S.C. §26(c)(2).

The decision whether to file a joint return or as married filing separately can have a considerable impact on your overall tax liability which will, in turn, affect the amount of economic resources you have to support your family. When confronted with this decision, the advice of an experienced tax professional can guide you in the direction to save the most money. If you have questions about your federal tax filing status or any other aspect of taxation, do not hesitate to contact the attorneys at Kershaw, Vititoe & Jedinak PLC today.

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