Married Filing Jointly: The Good and the Bad

Married filing jointly versus married filing separately?  Which checkbox should you tick?  That is the question that millions of Americans face each and every year during the tax season.  And this year is no different.

Whether you should be filing your taxes jointly or separately, all depends on your situation.

There are tons of tax benefits for filing jointly and some may say that the IRS prefers you to file that way (given all the added perks).  

But the fact still remains that sometimes, in your best interest, it is best to file separately.  Let's look at some reasons below.

Reasons to File Separately

And why should you file jointly?  Check out the 8 reasons you should file jointly below.

Reasons to File Jointly

So these are the reasons you should file jointly or separately.  But what are the downsides?  Are there reasons why you shouldn't do married filing jointly or married filing separately?

Well, I'm glad you asked because, yes, there are.  And we'll get into that more below.

Married Filing Jointly: The Pros

There are many many benefits to choosing married filing jointly as your filing status.  Let's take a look at these perks below.  

One thing to note, in order to be able to file jointly you must be married by the end of the tax year in question.  Or you must be living together for a specific amount of time in Common Law States.

Lower Tax Rate

The married filing jointly status can save you loads in taxes.

When you choose to file jointly, your income threshold increases.  This means that even though your combined income may be much higher than your individual income, you could still be taxed at a lower rate.

Let's take a look at the income limits and tax rates below.

Higher Income Contribution Thresholds for Roth IRA

If you want to make contributions to a Roth IRA, your income must be less than the limit set by the IRS.  And if you are married filing separately, the income limit is just $10,000!

That means if you are making more than $10,000 in a year you can NOT contribute to a Roth if you choose married filing separately. 

However, if you are married filing jointly the income limit jumps to $208,000. Which, in my humble opinion, is much much better than $10,000.

Higher Income Limits for Deductions

When you file your taxes jointly, you get the added perk of not only increased income thresholds for your tax rate but also on your deductions!  

This increase in deductions allows you to be able to reduce the amount of your taxable income even more.  

So if you choose married filing jointly, you can make up to $208,000 for your modified adjusted gross income (MAGI) and still get a partial deduction for your contributions to your IRA.

Whereas if you are married filing separately, your MAGI must be lower than $10,000.

Increased Standard Deduction

If you choose to file your taxes separately, you would only be able to take the standard deduction of $12,400.  But if you choose to file jointly, that standard deduction doubles to $24,800.

This reduces your taxable income by an extra $12,400.  That's a good chunk of change!

Higher Limits on Certain Deductions

In some cases when you file jointly, you'll be able to take advantage of higher deduction limits.  

For instance, your capital loss deduction would increase to $3,000 instead of the $1,500 deduction for singles.  

And for your housing, if you want to deduct home loan interest, you have a much higher limit to work with.

Access to more tax credits 

Little known fact, there are some credits you can only take if you are married and filing jointly.  And many of these credits are the much sought after refundable credits.  Who knew?!

Here is a list of all the credits that you can take when you file jointly:

• Earned Income Tax Credit (Refundable)
• American Opportunity Tax Credit (Partially Refundable)
• Lifetime Learning Credit
• Child and Dependent Care Tax Credit
• Adoption Tax Credit

All of these credits combined can save you over tens of thousands of dollars. So that is something you should look into before deciding whether to file separately or jointly.

Student Loan Interest Deduction

You can only deduct your student loan interest if you are a single filer or if you are married and choose to file jointly.  People who choose married filing separately are not eligible to take this deduction.

You can deduct up to $2,500 worth of student loan interest paid in a given tax year.  There are income limits that you should be aware of though ($170k for married filing jointly and $85k for singles).

Tax free exclusion of US bond interest and Social Security Benefits

If you have or are looking to purchase US Series EE and I savings bonds and you are married, the only way you can not pay taxes on the interest earned from these bonds is by filing jointly.

That is because when you file jointly you are able to take advantage of the education exclusion.  So if the funds are used for tuition, fees, books, or school equipment, you won't have to pay taxes on the interest.

As for Social Security benefits, filing jointly provides you with a higher income threshold.  So when you file jointly less of your SS benefits are taxable as compared to when you file separately when looking at similar incomes.

Married Filing Jointly: The Cons

Now it's not all sunshine and daisies for married filing jointly.  There are some downsides to it.  Let's explore these further.

Limited Use of Certain Deductions

If you or your partner has a huge medical bill, it might be best to file separately.  This is because you can only deduct the portion of your bill that is more than 7.5% of your adjusted gross income.

That adjusted gross income becomes much higher when you combine your finances with your spouse.  Which means the amount you can deduct becomes substantially lower.  

That is if you can deduct anything at all.

Your Spouse's Tax Deeds Become Yours

If you are married to someone with questionable morals when it comes to money and taxes, you may want to reconsider whether or not to file jointly.

That's because when you select married filing jointly, you are choosing to take responsibility for your spouse's tax deeds or misdeeds as the case may be.  

So if you know your partner has had some shady dealings, it might be better for you to save yourself the future legal headache and choose to file separately.

Married Filing Separately: The Pros

While there are a ton of reasons you should file your taxes jointly, there are also some very good reasons why you should file them separately as well.

You and Your Spouse are High Income Earners

If you don't have any children and you and your spouse are high income earners with similar incomes, it may be more beneficial for you to file separately.

Why?

Because this could actually save you in taxes by allowing you to be taxed at a much lower rate than if you had combined your incomes.  

Furthermore, with such high incomes already you may not even be able to qualify for those tax credits mentioned earlier.  Many of those credits have income limits that may eliminate you from the running.

Of course, you will have to do some calculations yourself to see if you would truly be better off filing separately.

Take Advantage of Medical Expense Deduction

If you or your spouse had a very bad year in terms of health and doctors visits, you may have racked up quite substantial medical bills.  

Luckily for you, the IRS allows you to deduct the amount you paid in medical expenses over 7.5% of your income.

The downside is if you choose to file jointly the amount that you can deduct is greatly reduced.  So if you or your spouse had huge medical bills last year, consider filing separately to take advantage of this deduction.

Note: The same goes for Casualty losses which can be deducted if over 10% of your adjusted gross income.

You or Your Spouse Has Tax Liabilities

We talked about this a bit above but it deserves repeating.  One of the biggest reasons you will want to consider filing your taxes separately is to avoid being responsible for your spouse's tax errors and liabilities.

If he or she wants to dance with the tax man, let him or her do it on her own time.  I know I, for one, don't got time for it.

So if you notice your spouse has had some questionable under the table dealings, you'll want to strongly consider filing separately.

Your Income Determines Your Student Loan Payments

There are some student loan repayment plans that determine how much your monthly payments will be based on your income.  

Revised Pay As You Earn (REPAYE), Pay As Your Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR) are all income-driven repayment plans.

If you choose married filing jointly, your income will essentially increase by the addition of your spouse's income.  Consequently, your monthly payments could increase as well.

So, if by adding your spouse's income your loan payments would increase dramatically, you may want to consider checking married filing separately.

Married Filing Separately: The Cons

Lower Standard Deductions

Choosing to file your taxes separately means you will have a much lower standard deduction.  Instead of $24,800, you would only be able to deduct $12,400.

Note: If you plan on itemizing your deductions this won't affect you.

Can't Take Deductions for Student Loan Interests

Sadly, if you choose married filing separately, you are no longer eligible to take deductions for the interest paid on your student loans.

That is a loss of up to $2,500 in potential deductions.

Smaller IRA Income Limit for Deductions

When you choose to file separately, you have a substantially lower income limit for deducting your contributions to your IRA.  For married filing separately the income limit for taking a deduction is $10,000.

So, if you make more than that you won't be able to deduct any of your contributions to your IRA.  Below $10,000, you will be able to take partial deductions.

Disqualified From Some Tax Deductions & Credits

A significant downside to filing separately is that you lose the ability to take some deductions and credits such as:

• Earned Income Tax Credit
• Child and Dependent Care Tax Credit
• American Opportunity Credit
• Lifetime Learning Credit

Which means you lose out on more opportunities to reduce your tax bill and get a much higher tax return.

Itemized Deductions

Another con of choosing to file your taxes separately is that if your partner chooses to itemize you would have to itemize as well.  

This could be a pain to do and could significantly affect your tax return if your itemized deductions are not as high as the standard deduction.  

As a result, your taxable income will be higher which could result in a higher tax bill.

All in All

Whether you choose married filing jointly vs. married filing separately is completely up to you.   But know that the decision you make could have major repercussions on your bottom line.

So take the time to go over your financial situation and select the filing status that will benefit you and your finances the most.

Happy Filing!