In general, the decision will depend upon which filing status results in the lowest tax. But bear in mind that, if you and your spouse file a joint return, each of you is jointly and severally liable for the tax on your combined income, including any additional tax that IRS assesses, plus interest and most penalties. This means that IRS can come after either of you to collect the full amount. Although there are provisions in the law that offer relief from joint and separate liability, each of those provisions has its limitations. Thus, even if a joint return results in less tax, you may choose to file a separate return if you want to be certain of being responsible only for your own tax.
In most cases, filing jointly offers the most tax savings, particularly where the spouses have different income levels. The “averaging” effect of combining the two incomes can bring some of it out of a higher tax bracket. For example, if one spouse has $75,000 of taxable income and the other has just $15,000, filing jointly instead of separately for 2017 can save $2,295 in taxes.
Note that filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use the “married filing separately” rates. These rates are based on brackets that are exactly half of the married filing joint brackets but are still less favorable than the “single” rates. This means the “marriage penalty” (which requires some marrieds to pay at a higher tax rate on the same total income than they would pay if each filed as a single) isn’t eliminated by filing separate returns. Although Congress has provided relief from the marriage penalty in the tax rates, those changes don’t provide a complete solution.
There is a potential for tax savings from filing separately, however, where one spouse has significant amounts of medical expenses, casualty losses, or “miscellaneous itemized deductions.” These deductions are reduced by a percentage of adjusted gross income (AGI). Medical expenses are deductible only to the extent they exceed 10% of AGI (7.5% of AGI for taxpayers age 65 or older in 2016), and casualty losses must exceed 10% of AGI. Miscellaneous itemized deductions, which include a variety of deductions such as investment expenses (other than investment interest), unreimbursed employee expenses, and tax return preparation costs, are deductible to the extent their combined total exceeds 2% of AGI (often referred to as a “2% floor”).
If these deductions are isolated on the separate return of a spouse, that spouse’s lower (separate) AGI, as compared to the higher joint AGI, can result in larger total deductions. For example, assuming both spouses are under age 65 for 2017, if one spouse has $9,250 in medical expenses and joint income is $90,000, then only $250 is deductible on a joint return, because 10% of $90,000 is $9,000 (and $9,250 − $9,000 = $250). But if the income of the spouse with the medical expenses is separately only $15,000, the deduction increases to $7,750 on a separate return, because 10% of $15,000 is only $1,500 (and $9,250 − $1,500 = $7,750).
Other tax factors may point to the advisability of filing a joint return. For example, the child and dependent care credit, adoption expense credit, American Opportunity tax credit, and Lifetime learning credit are available to a married couple only on a joint return. And you can’t take the credit for the elderly or the disabled if you file separate returns unless you and your spouse lived apart for the entire year. Nor can you deduct qualified education loan interest unless a joint return is filed. You may also not be able to deduct contributions to your IRA if either you or your spouse was covered by an employer retirement plan and you file separate returns. Nor can you exclude adoption assistance payments or any interest income from series EE or Series I savings bonds that you used for higher education expenses if you file separate returns.
Another argument for filing jointly can arise regarding the overall limitation on itemized deductions and the personal exemption phase-out, both of which apply in 2017 when AGI exceeds $313,800 on a joint return and $156,900 for marrieds filing separately. If one spouse has AGI over $156,900 and the other spouse has AGI less than $156,900, it would be advantageous for them to file jointly in order to take full advantage of the $313,800 trigger point for the limitations. For example, if one spouse has AGI of $180,000 and the other spouse has AGI of $110,000 and they file separately, the spouse with AGI of $180,000 will be subject to both the limitation on itemized deductions and the personal exemption phase-out. If the spouses file jointly, however, they won’t be subject to either limitation.
In addition, social security benefits may be more heavily taxed to a couple that files separately. The benefits are tax-free if your “provisional income” (your adjusted gross income with certain modifications plus half of your social security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return but zero on separate return (or $25,000 if the spouses didn’t live together for the entire year).
Unfortunately, there are not any hard and fast rules of thumb for when it pays to file separately. The tax laws have grown so complex over the years that there are often a number of different factors at play for any given situation. However, there is one approach guaranteed to come up with the correct decision. We can simply calculate your tax bill both ways: jointly and separately. Then the approach that leads to overall tax savings could be used.