When does married filing separately make sense

Some married couples choose to combine all their finances. Others prefer to keep some or all of their accounts separate. But most of the time, married couples file one joint tax return. You don’t have to do it that way, but it usually means you’ll pay less taxes — though not always. 

Married Filing Separately tax status allows each spouse to file their own tax return and pay their own taxes based on the income each spouse earned throughout the year. This could be a valuable tool if you’re working through a divorce or separation. It can also make financial sense for couples with very different incomes or if one partner has a lot of debt. 

Married Filing Separately isn’t common, and it isn’t a good fit for many couples — filers lose out on lots of tax credits and face tighter tax brackets. Tax brackets are progressive, meaning that higher incomes have higher tax rates. 

Remember, this does not mean that if you’re in the 32% bracket, you’ll pay 32% on ALL your income. This is a common misconception. Your effective tax rate is the average amount you’ll pay on every dollar you earn. To figure out your effective tax rate, look at your 2020 tax return and divide the total taxes you paid by your taxable income.

Should you consider filing separately next year? If you’re thinking about it, you’ll need to take some steps throughout the year to prepare. 

Who Should File Separately?

Married Filing Separately status was originally created for couples working through a divorce or separation. When you file separately, both spouses take responsibility for their own tax bills and receive their own refunds. 

In most states, marriage means you’re responsible for your spouse’s tax liability and vice versa. If you’re working to disentangle your assets and don’t want to risk becoming responsible for a tax bill, filing separately can offer some liability protection.

Within a marriage, it’s most common to file separately when one spouse earns significantly more than the other, especially if the spouse who earns less could claim itemized deductions. 

Investopedia gives a good example of a time when this would make sense: Two people with very different incomes, in a year when the spouse earning less could deduct unreimbursed medical expenses. If the couple files jointly, none of those expenses would be deductible, because their joint income would be too high; but if they file separately, the spouse who had those medical expenses could deduct thousands of dollars because the lower earning spouse would be subject to a lower dollar threshold in order for those medical expenses to be deductible.

A quick note, though: If you file separately, both spouses either have to itemize or claim the standard deduction. One spouse can’t itemize and the other person claim the standard deduction, even if that would be more advantageous to them. So this will only reduce your tax liability if one spouse is claiming really large deductions. 

Does One of You Have a Ton of Student Loans?

Another common reason to file separately is if one spouse is pursuing income-driven student loan repayment plans. Federal student loan borrowers on the Income-Based Repayment Plan (IBR) and the Pay As You Earn (PAYE) plan can have their payments determined based solely on their income, not their combined income as a couple, if they file taxes separately from their spouse. This could reduce monthly loan payments significantly. 

This is when I’ve seen the biggest benefit of a couple choosing to file as MFS on their taxes. For example: if one spouse owes $200,000 in student loans and only makes $50,000 per year, but the other spouse makes $200,000, filing separately can help keep the student loan payments to a minimum.

This loan simulator can be extremely helpful when trying to decide if it makes sense to file a joint tax return or separately. If you owe slightly more taxes by filing separately but your student loan payments would go down significantly, I would encourage you to strongly consider filing separately, and redirect the money you saved on your student loan payments to other financial goals — like paying down credit card debt, building up emergency savings, and funding retirement accounts. 

If you are hoping to have your student loans forgiven, then make sure you know the ins and outs of the income driven repayment plan you’re on as well as how to calculate your payment when your income changes. In addition, Public Service Loan Forgiveness (PSLF) is the only repayment plan in which the balance forgiven is exempt from taxes on the forgiven amount. If you think you’ll qualify for loan forgiveness, it would make sense to keep your payment as low as possible.

What Do You Lose By Filing Separately? 

For most couples, filing jointly still makes more sense than filing separately. That’s because some tax credits are only available if you file jointly or as a head of household. 

Some of these include the child and dependent care tax credit, the earned income tax credit, and — if you live with your spouse — the credit you receive for caring for someone elderly or disabled.

It’s also important to note that the income phase-out threshold for the IRA deduction and Roth IRA eligibility is lower if you file separately.

What To Know If You File Separately 

You don’t have to maintain the same tax status throughout your marriage. It might make sense to file separately one year to take advantage of a particular deduction and then go back to filing jointly, especially if you have kids. 

In general, remember that there’s no one-size-fits-all solution when it comes to the tax code. Every family’s situation is different every year as incomes, expenses, and life circumstances change. 

If you’re strongly considering filing as married filing separately, I recommend that you work with a CPA who can run a side-by-side summary of your estimated taxes due and a financial planner who can help you figure out what you might gain from filing separately or whether it makes more sense to keep filing jointly.

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