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Married Filing Separately: The Forgotten Filing Status

by Tim Schlotterer

So you and your spouse have decided to check the “Married Filing Jointly” box on your 1040 again?

Good! Chances are you probably should, as your alternative is generally not the most favorable. By filing a Married Filing Separately return, you and your spouse will immediately be precluded from taking common credits, prohibited from enjoying the one thing that makes those student loan payments less painful, the deduction for student loan interest (as well as a plethora of other education-related benefits), and your capital loss deduction and AMT exemption will be slashed in half. Sounds like a no-brainer to me!

But wait! Before you close this window, break out your trusty felt-tip sharpie, and check that “MFJ” box like there’s no tomorrow, take a second to consider a couple situations where it may be in your best interest to, in fact, file separately from your spouse.

Situation #1: I have very high medical expenses and my spouse doesn’t.

Many itemized deductions are limited by certain percentages of your adjusted gross income (AGI) as calculated on page one of your return. For example, deductible medical expenses are reduced by 7.5 percent of your AGI, limiting the possible tax benefit. If you or your spouse incurs medical expenses, you will only be able to receive the benefit of the tax deduction if the medical expenses exceed 7.5 percent of the cumulative adjusted gross incomes of both spouses. However, if you file separately, deductible medical expenses must only exceed the AGI of the spouse to whom the expenses relate. In the unfortunate situation when you or your spouse has abnormally high medical expenses, you will be able to deduct more of these expenses by filing separately since the AGI threshold is lower. The benefit of filing separately will be even greater if the spouse who has incurred the medical expenses has much lower income than the other spouse, which can often be the case when there are absences from work due to medical conditions.

Situation #2: I don’t want to be liable for my spouse’s tax.

When taxpayers file a joint return, both spouses can be individually liable (joint and several liability) for the entire amount of tax due, any adjustments to the tax by the IRS, and any related penalties or interest relating any of the jointly filed returns. For example, even if two taxpayers have been divorced for multiple years, they can still be held liable for the entire amount of any tax due, interest or penalties resulting from a joint return he or she filed with their ex-spouse four years ago! Joint and several liability for “MFJ” filers (or former “MFJ” filers) can be avoided with certain forms of relief provided by the IRS, given that they qualify. However, by filing separately, taxpayers avoid joint liability altogether, as each spouse is only liable for any tax due, interest, or penalties relating to his or her own separate return. By filing separately, spouses can automatically avoid the future administrative hassle of attempting to qualify for some form of IRS relief, or even avoid potential litigation.

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