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#22 Should I File My Taxes Separate From My Spouse?

#22 Should I File My Taxes Separate From My Spouse?

May 12, 2023

Each tax filing year, married couples can decide to file their taxes Married Filing Jointly, or Married Filing Separately.

In this episode, we talk about some of the pros and cons of each filing strategy, and give examples of scenarios where it might make financial and legal sense to file apart.


2022 Federal Tax Brackets 


 Brenton: Every year couples across the country, file their taxes without going through a thorough process of evaluating whether they should file together or separately. In this episode, we talk about two popular tax filing strategies, married, filing, jointly, and Married Filing Separately, the pros and cons of each and how you can know whether one option may be the right option for you.
Let's get started.

Hello. My name is Brenton Harrison of New Money, New Problems and your host for the New Money, New Problems podcast. It is tax season. Tax season is upon us. And as we get closer to the tax filing deadline, I wanted to go through an episode where we talked to you how to file your taxes or what [00:01:00] you should think about when you're filing your taxes as a married couple.
And there are pros and cons to each filing strategy that you need to be aware of, and that knowledge starts with seeing how tax brackets work for married couples together versus how they work when you file separately.
If you're following along with us on our YouTube channel, and we'll put this article in the show notes, what you have in front of you are the tax brackets for the tax year 2022. And you see the marginal tax rates on the left hand side. And then on the top, you see the tax filing statuses, single head of household, married falling jointly, and married falling separately.
If you're looking at the single column, you will see that for the 10% tax bracket, everything you earn from $0 to $10,275 is taxed at a rate of 10%. Now, if we go all the way over to the Married Filing Jointly column, you will see that [00:02:00] everything that a married couple filing together earns from zero to $20,550 is taxed at 10%. If you're not paying attention, they have basically doubled the amount that is allowable in that 10% bracket if you're Married Filing Jointly, as compared to a single person. Now let's go to the last column on the right, Married Filing Separately. You will see that the portion of your income, that's taxed at 10% is the same as that of a single taxpayer $0 to $10,275.
The IRS functionally says that because you are married, but you are filing your taxes alone, we are going to treat your income as if it's being taxed at the rate of a single taxpayer.
Now you may be thinking about this and saying, what's the big deal. If they are doubling the amount in each bracket when you file together, it should be the same impact as if you filed individually.
And there are some scenarios where if you and your [00:03:00] spouse made a very similar amount of money, Where the taxable impact may not be as large by filing separately in terms of your tax bracket alone. I will illustrate. For the examples we'll use in this episode, we are going to have the number $200,000 used over and over again. In some scenarios, it'll be $200,000 taxable income and some it'll be $200,000 Adjusted Gross Income.
So in this example, let's assume that we have a couple who earns a $200,000 taxable income, which is going to be applied to these tax brackets and that each partner earns exactly a hundred thousand dollars. If you look at the Married Filing Jointly window, you will see that they will fall in the 24% marginal tax bracket.
And they would have about $21,000 of their taxable income taxed at that 24% rate. Now, if that same couple filed their taxes, Married Filing Separately, you will see that it [00:04:00] puts them in the same 24% marginal tax bracket. And when you total up that number that they pay combined, it is very similar in this scenario to what they would've paid had they filed their taxes jointly. But what if this scenario wasn't so equal and one person in this partnership earned significantly more than their partner as can happen. Let's now look at the same scenario if they had a $200,000 taxable income with one person in the partnership, earning $150,000 taxable income. And the other earning $50,000. What you'll find by applying these incomes to the married following separately brackets, Is that the person having a taxable income of $50,000 actually falls into a lower tax bracket. They're now in the 22% marginal tax rate. And about $8,000 of their income is taxed at that level. But if we look at their partner, Who earns $150,000 taxable income, it is a radical [00:05:00] difference. They have $61,000 taxed at 24%. They alone in this scenario are paying almost three times more at 24% than as a couple they were paying when they both earned the same income. But that's not the only potential negative consequence of doing so.
If you file Married Filing Separately, each person in the partnership has to file their taxes the same way when it comes to using the standard deduction or itemizing , even if it works to their detriment.
Meaning that if I feel on my tax return by filing separately, I can far exceed $12,950, I can do so. But my spouse has to use that same strategy and they cannot use my tax deductions.
So if they total up their own and find that they only have a few thousand to use at their disposal, they have to use those deductions and they forego the $12,950 that they could have used [00:06:00] by using the standard one.
Another potential consequence to filing your taxes, Married Filing Separately, especially for those who have dependents is the loss of some potentially valuable tax credits. We talked about in a previous episode, the Child and Dependent Care credit, which applies to parents who incur childcare expenses so that they can go earn an income. But when you file Married Filing Separately, you are disallowed from using that credit on your return. The same applies to tax credits that relate to your education, like the lifetime learning credit, the American opportunity tax credit, which is set aside for parents or adult students who are incurring higher education costs for things like college and community college. These are valuable tax credits that you cannot use if you file your taxes, Married Filing Separately.
And lastly, we talked about Adjusted Gross Income in a previous episode. And one thing you need to know is that Adjusted Gross Income and another iteration of it called modified Adjusted Gross Income dictate a number of things that you can or [00:07:00] cannot do when it comes to investment accounts and taxation. For example in 2022, if you're a married couple that files your taxes jointly, and one of you is trying to contribute and deduct your contribution to a pre-tax IRA, you can do so if your modified Adjusted Gross Income falls below $204,000. Now, if you file your taxes, married, falling separately, you would think that they would just cut it in half and it would be $102,000 per person. But instead they decreased that limit all the way down to $10,000. If your Modified Adjusted Gross Income is higher than that amount, you can contribute to a pre-tax IRA, but you cannot deduct that contribution A significant reduction. in the combination of all these things can lead in many cases to a couple that chooses to file separately, having a much higher tax bill than what they would've seen had they filed together.
But after the break, we'll tell you how, even [00:08:00] in spite of these things, there are some scenarios where Married Filing Separately is still worth it. There are some scenarios where it will lead to lower taxes because of things that happen in that tax year. And there are even some scenarios where doing so is worth it, even if it leads to higher taxes.
Brenton: Before the break, we told you almost every reason a person wouldn't file their taxes, Married Filing Separately. And I told you, in the second half of this episode, we tell you why they would. And you're probably thinking, how is that even possible given the things that you just shared. Well, believe it or not, there are a number of reasons why a person would and should consider doing so in certain circumstances. One of those reasons is the number or the amount of tax deductions that you could use if you filed separately that you either wouldn't or wouldn't be able to use in full, should you file jointly.
An example of one that you would be totaling up are your [00:10:00] health expenses throughout the year.
Things like your health insurance premiums, things like your deductibles, your copays. If you had any surgeries. Well, when you look at the tax code, it says that you can deduct medical expenses that go above 7.5% of your Adjusted Gross Income. So let's go back to our $200,000 example where we have a couple that has a $200,000 Adjusted Gross Income. And we're going back to the second iteration of our example, where one person in the partnership earns $150,000 Adjusted Gross Income. And the other person has the remaining 50,000. So let's assume that the person who has the $50,000 Adjusted Gross Income, should they file separately, has significant health expenses in a given year, maybe $10,000 worth of health expenses. If they chose to file Married Filing Jointly with their spouse, they would have a $200,000 Adjusted Gross Income, and they can only deduct the medical expenses that exceed [00:11:00] 7.5% of that number 7.5% of 200,000 is $15,000. So even though they had $10,000 worth of medical expenses, they cannot deduct any of them because it falls below that 7.5% threshold. Conversely, if they decided to file their taxes, Married Filing Separately, the partner who has the $50,000 Adjusted Gross Income can now look at their $10,000 of medical expenses and can claim a significant portion of them as a deduction. Because 7.5% of 50,000 It's $3,750, which means that they can now deduct over $6,000 of health expenses. Because by filing separately, they have decreased the number that falls within that 7.5% threshold.
Another very common scenario that could impact your decision to file your taxes Married Filing Separately versus jointly is whether you have federal student loans. Over the past several months, you might have heard or seen [00:12:00] updates about income driven repayment plans, and that plan is the Revised Pay As You Earn plan. We're going to, again, assume that our couple has a $200,000 Adjusted Gross Income that they're using to calculate this student loan payment.
And in going through the calculation, using the updated rules for Revised Pay As You Earn, should they file their taxes together, it would lead to them having a student loan payment of about $1,100 a month. Now let's assume that in doing this calculation, we are going to remove the partner with the $150,000 Adjusted Gross Income from the equation because they do not have student loans. And instead we're going to file separately using the Adjusted Gross Income of the partner with the $50,000 Adjusted Gross Income. In doing so using these updated rules, they would go from filing their taxes jointly and paying over $1,100 a month towards their loans, to not having a student loan payment at all, using the discretionary income [00:13:00] calculation as it is under the new guidelines. That is over $12,000 a year of savings. And this is a scenario where they would have to compare those savings to what it might cost them to file their taxes separately in additional taxes to weigh the best option of the two. As an example, if they found out that it saved them $12,000 in student loan payments, but cost them $15,000 in taxes, it wouldn't be worth it. But if it saved them $12,000 in payments and cost them $8,000 in additional taxes, there is still a $4,000 net benefit that would tell them it makes sense. In this scenario to file their taxes apart.
And then lastly, there is a consideration of filing your taxes together or separately that has little to do with the actual financial element and a lot to do with the risk that comes with not knowing what your partner is doing. Maybe they have children from a previous relationship and they alternate claiming the dependent on their tax return [00:14:00] with the child's other parent. If you're having marital troubles and you've separated, you might also choose to file separately. If you've separated but not divorced, and you did not live with that partner for the entirety of the tax year, it can actually increase some of your allowances for what you can deduct and what you can claim as a credit if you let your tax preparer and know that you did not live with them throughout the course of the year. All of these things are meant to not only highlight the pros and cons of filing jointly versus separately, but it's also meant to highlight the value in my opinion, of paying the few hundred dollars that it costs to have a professional file your taxes. To me, there is a measure of comfort that comes from not leaning on your own understanding for something that you do once a year, as compared to someone who does it every single day of their professional career. So I hope this was illuminating. I hope it gave you some things to think about when it comes to your tax status and your tax activities in each taxable year. If you have a tax professional, it might bring up [00:15:00] things that you can discuss with them when it comes to year yearly tax planning. And if you do not have a tax professional, I hope this goes one step further in encouraging you to find one for this upcoming taxable year.