As a couple, should you and your spouse file your taxes jointly or separately? That depends on several factors, but for the majority of couples, the answer is to file jointly.
Of course, for the married filing jointly status to apply, you must be married. You are considered married if you were married on the last day of the year (including common law marriage), or if you were in the process of a non-finalized divorce on the last day of the year.
Domestic partners and couples in civil unions are not allowed to file jointly. As of February 2014, the IRS considers same-sex couples married for federal tax purposes if they were married in a state that recognizes same-sex marriage – regardless of where they live.
Why is married filing jointly preferred by most? To best answer this question, it is helpful to consider the disadvantages of married filing separately. The primary ones are:
- Deductions – Separate filing significantly drops your standard deduction, and reduces or eliminates many itemized deductions. You lose the education deductions, both student loan interest and tuition and fees. More of your Social Security benefits are taxable. Capital loss deductions are cut in half. The phase-out range is dropped for IRA deductions. These are just some of the changes; you should check IRS Publication 501 for details.
- Credits – Your ability to claim credits are limited. You cannot take the Earned Income Tax Credit, the education credits (American Opportunity Credit or Lifetime Learning Credit), or the elderly or disabled credit. You generally cannot take the child and dependent care credit or adoption credits, and the child tax credit is reduced at half of the income level compared to a joint return.
- Choice of Itemization – You and your spouse must either both take the standard deduction or both itemize deductions. You cannot itemize while your spouse takes the standard deduction, or vice versa.
- Alternative Minimum Tax – The exemption for figuring the Alternative Minimum Tax is cut in half.
- Tax Rates – Higher tax rate brackets kick in at lower income levels when filing separately.
- Community Property – If you live in a Community Property state such as Arizona, California or Texas, state laws dictate what property is considered separate and what is considered community for tax purposes. You could face a paperwork nightmare of splitting assets 50/50 if you both itemize.
With all of those disadvantages, why would anyone ever choose married filing separately? There are a few possible reasons:
- Questionable Tax Practices – If your spouse is stretching tax laws (or breaking them outright), then you will want to file separately. You both have to sign joint returns, and in that case, you and your spouse are held "jointly and severally liable," meaning that you are responsible to pay the tax, along with any penalties and fines, if your spouse does not.
- Divorce/Separation – If you are in the process of a separation or divorce, you may want to begin to separate your finances, and thus your tax filings.
- Income Adjustment – For itemized deductions that must meet a threshold expense relative to income, it may make more sense to file separately. The classic example is a couple with a wide income gap and significant out-of-pocket medical expenses. Jointly they could not meet the 10% threshold of expenses to income to allow a deduction, but the spouse with the lower income would easily qualify by filing separately.
It might make sense for you to model your taxes both ways before filing -- just to be sure. For most couples, however, the higher deductions and credits available under married filing jointly make it the preferred choice.