For most couples, filing together makes good financial sense – the tax code is structured to benefit married couples, fairly or not. According to the IRS, roughly 95% of all married couples file joint tax returns. However, before you check the “married filing jointly” box on your 2021 return, see if any of these scenarios apply to you.
When should you file a joint tax return?
Several major deductions and tax credits generally apply only to couple who file jointly:
- The earned income tax credit (EITC) for low to mid-income couples.
- The child and dependent care credit.
- Education-related credits and deductions including student loan interest deductions.
In addition, the child tax credit phase-outs (the income level at which the credit gets smaller or disappears) favor married couples who file jointly. Their adjusted gross income can be as high as $400,000 before the credit phases out; for everyone else it is capped at $200,000.
There’s another important consideration as well. If you choose to file separate returns, each spouse must use the same method for deductions. If your spouse itemizes deductions, you must too, and that can be costly.
When should I file a separate tax return?
There are several scenarios when a married couple may want to consider filing separate tax returns. Such as:
- One spouse has significant tax liabilities. This is a difficult subject for many couples to discuss, but it’s important to note that if one spouse enters the marriage owing back taxes, both partners become liable once they file a joint return. Couples in which one or both partners are principals in a business where there are significant tax risks may also wish to file separately, because both spouses would be liable for any tax liabilities incurred by the other if they file a joint return. Also, if one spouse owes unpaid child support or is behind on student loan payments, you run the risk of your tax refund being offset to cover these liabilities if you file a joint return.
- One spouse has significant medical expenses. You’re allowed to deducted medical expenses above 7.5% of your adjusted gross income. This is a steep threshold to meet for many high-income couples, but depending on your situation, you may come out ahead filing separately. It’s important to look at your entire picture. In doing so, you will be able to best determine whether other credits available to joint filers would offset the advantages of itemizing medical expenses.
- There are trust issues. A word of caution for all couples: If you suspect your spouse is hiding income or engaging in other ways that suggest tax evasion, you should give serious thought to filing separately. A joint tax return puts you, your income, and your joint assets at risk for any tax liabilities that result. Finally, if you believe divorce may be on the horizon, resist the impulse to file a joint return, and think through your options. Separate tax returns can make the financial separation process less complex and consequential.
If you have concerns about how to file, consult your tax professional and financial advisor.