Can married taxpayers file separately to lower their tax bills? According to MWE tax partner Lance Christensen and senior tax manager Jennifer Bobé, it depends on a couple’s specific financial situation. Yesterday, Fox Business caught up with the pair to discuss the situations in which married couples, or soon to be divorced couples, can potentially lower their tax bill by filing separately.
By Brittany De Lea
While marriage and household formation is generally considered a positive for the U.S. economy, it can sometimes be a negative for taxpaying spouses.
Some couples face what is known as a marriage penalty, which means if they file jointly they incur higher tax rates than if they had filed separately.
Here’s how it works: Sometimes in the U.S. tax system, two individuals with similar, higher incomes tying the knot are penalized because they are pushed into a higher income bracket, while exemptions or phase-out ranges remain constant. Couples with disparate incomes, on the other hand, may be better off.
While the Tax Cuts and Jobs Act eliminated the issue for some taxpayers, the highest-earning couples could still face a penalty if they file jointly. The controversial $10,000 cap on state and local tax deductions, for example, is not doubled for married couples.
“In almost all cases the tax is less when you file jointly, but there are a lot of variables in taxes — different thresholds where deductions are phased out — so there can be unusual situations where the taxes can be less on married filing single,” Lance Christensen, a partner at accounting firm Margolin Winer & Evens, told Fox Business. “It’s very case-specific.”
Sometimes the strategy makes sense, Christensen noted, for a spouse who had significant medical expenses throughout the year. In this case, if the medical expense is deductible, a couple may be able to lower their overall burden by filing separately.
At his practice, he helps clients by running their finances through both options and determining which might be more favorable.
There are other reasons a married couple may file separately – not pertaining to lowering tax obligations.
Those include a pending divorce, Jennifer Bobé, a senior manager at Margolin, Winer & Evens LLP, told Fox Business. In other cases couples who are married but don’t want to be responsible for the information on their partner’s tax return may file separately.
“I see that a lot, where the one spouse has a lot of complications and the other spouse has a very simple tax profile and they’re married but they agree to file separately,” Bobé said. “Because of the exposures and complexities, they want to keep it separate.”
Christensen added that, in some cases, couples who are legally separated and awaiting divorce can file as single rather than married filing separately – and that will result in lower tax obligations.
The best method for each person and each couple, however, will ultimately depend heavily on their specific financial circumstances.