You do not need to think twice before answering the question of your marital status. The answer can, however, get complicated when you are filing your tax. For tax purposes, the last day of the month determines your marital status.
If your marriage is valid by law on 31st Dec, you are married for the whole year as far as Uncle Sam is concerned. If you are married based on IRS's rule, you have a tax decision to make: filing jointly or separate filing.
The status you chose for your tax is not a factor in your marriage situation. It involves making the best decision for your finances. There are pros and cons for each filing status. This article will explore the essential things you need to know about filing separately.
Pros of Married Filing Separately
Some pros come with filing separately.
1. Impressive Opportunities for Deductions
Filing separately will bring down your tax bills if you and your partner have many deductions. There are tax breaks you will get if your deduction is above a certain percentage of your adjusted gross income (AGI). If you separate your income, there is a better chance of meeting the threshold.
2. Refund Protection
For people with a spouse having financial troubles like tax debts, default federal student loans, unpaid child support, etc., filing jointly can put your tax refund at risk. The IRS might hold part of your tax refunds to service the debt, not minding your spouse deductions.
Filing separately makes the IRS process your refund and your spouse's refund separately.
3. Avoid Collections
Filing jointly makes both parties liable for the tax due. For instance, your spouse might have a series of income but no enough tax withheld from their paycheck. He also might not make estimated payments.
Filing jointly and owing a considerable tax bill than you can afford will make the IRS come up with other aggressive collection methods. They might garnish your wage or levy your bank account. When you file separately, you protect your asset and salary from the IRS.
4. You Enjoy Legal Protection
We want to assume you have a trustworthy spouse. Should they, however, falsify their tax return, you will be saved from an audit. Filing jointly with a spouse that commits tax fraud like income omission, claiming ineligible tax credits, etc., can make you equally responsible since you signed the joint return.
While there is an “innocent spouse” protection to checkmate cases of fraud, proving that you didn't know about the fraudulent activity is a significant challenge on its own.
Cons of Married Filing Separately
Without a doubt, the benefits discussed above can be valuable, depending on your circumstance. However, there are the potential disadvantages to watch out for when going for the married filing separately (MFS) status.
1. If a partner optimizes, both partners must optimize. If any of the partners has little itemized deductions, it will raise the taxable income a bit higher compared to what they will have if they claim the standard deduction.
2. The married filing separately (MFS) status also does not encourage many tax breaks. This means that you cannot enjoy deductions, education credits (Lifetime Learning Credits, and the American Opportunity Tax Credit). Also, you cannot remove the interest in the U.S. savings bond directed to pay education expenses. There is no chance for claiming the Child and Dependent Care Credit, the Earned Income Tax Credit, or the credit for adoption expenses. You might, however, enjoy half on some credit like Child Tax Credit.
3. Deduction contribution to a Traditional IRA might not be possible with the married filing separately (MFS) status. For 2019, married couples enjoying a retirement plan can remove the entire IRA contribution up to the annual threshold. Joint filing is possible with a modified AGI of $103,000 or less.
4. In conclusion, there is a half deduction (to $2,500) for employer-provided dependent care assistance income exclusion for separate filers. It will also reduce your capital loss deduction by half, from $3000 to $1500
Conclusion
For married folks, filing separately and jointly comes with its advantages and disadvantages. We hope this article will guide you in the right direction if you consider the best course of action.
