If you're happily married, conventional wisdom says you should file a joint federal income tax return with your spouse. However, there are exceptions. Here's the story, starting with the basics.
Married at year's end equals married all year
Your marital status for federal income tax purposes generally depends on whether you were married as of Dec. 31 of the year in question. For example, say you got married near the end of 2011. As far as the Internal Revenue Service is concerned, you were married for all of last year. So your 2011 tax filing options are limited to: (1) filing jointly with your spouse by combining your income and deductions on one return for the entire year, or (2) using married filing separately status, which requires you and your spouse to file independently, showing your separate income and deductions for the entire year on your respective returns.
Why not file jointly?
Filing jointly will surely reduce the combined tax hit on you and your spouse. Right? Not necessarily. In many cases, the biggest reason to file jointly is because it eliminates the need to file two returns. In other words, joint filing is simply more convenient. You may not save a dime in taxes.
That said, filing jointly usually does lower your tax bill when one spouse earns a healthy amount of income while the other earns quite a bit less or nothing. The reason? The joint-filer tax brackets are exactly twice as wide as the MFS brackets. So when one spouse earns quite a bit and the other not so much, filing jointly will usually cut your tax bill because more of the higher-earning spouse's income gets taxed at lower rates. In this situation, the conventional wisdom is correct, and filing a joint return is the tax-smart option. Still, you should not reflexively reject the MFS option. It can save taxes in certain circumstances that could apply to you.
When and how to file separately
You should always check out the potential advantage of using MFS status whenever: (1) both you and your spouse have taxable income, and (2) at least one of you (preferably the person with the lower income) has significant itemized deductions that are limited by adjusted gross income. Basically, AGI is the sum of all your income items (salary, capital gains, dividends and so forth) reduced by non-itemized write-offs claimed on Page 1 of Form 1040 (retirement account contributions, alimony paid, job-related moving expenses and so on). When you use MFS status, you separately calculate your AGI and your spouse's AGI, and this can work to your advantage.
The three most common itemized write-offs that are limited by AGI are:
- Medical expenses (deductible only to the extent they exceed 7.5% of AGI).
- Personal casualty losses (deductible only to the extent they exceed 10% of AGI).
- Miscellaneous itemized expenses such as unreimbursed employee business expenses, fees for tax advice and preparation, and investment expenses (deductible only to the extent they exceed 2% of AGI).
When you have these types of expenses, filing separately can lead to tax-saving results, because the AGI numbers on your separate returns will be lower. Therefore, your allowable deductions for these types of expenses may be considerably higher if you file separately. Here's an example.
You and your husband both work. Your husband earns less. He also incurred $10,000 of uninsured medical expenses in 2011 (which he paid out of his own resources), while you had no medical expenses. Here are the federal income tax results for 2011 if you file jointly versus using MFS status.
| File Jointly | File using MFS status: husband | File using MFS status: wife | |
|---|---|---|---|
| Salary income | $135,000 | $55,000 | $80,000 |
| Adjusted gross income | $135,000 | $55,000 | $80,000 |
| Medical expenses | ($10,000) | ($10,000) | None |
| 7.5% of AGI | $10,125 | $4,125 | None |
| Medical expenses deduction | None | $5,875 | None |
| Other itemized deductions | ($20,000) | ($10,000) | ($10,000) |
| Personal exemptions | ($7,400) | ($3,700) | ($3,700) |
| Taxable income | $107,600 | $35,425 | $66,300 |
| Tax bill | $19,150 | $4,981 | $12,700 |
| Combined tax bill | $19,150 | $17,681 | $17,681 |
Using MFS status would save you and your spouse a combined $1,469 ($19,150 minus $17,681), and all it takes to collect this benefit is filing separate federal returns (you may have to file separate state returns too).
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