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When married couples should file separate tax returns

When married couples approach tax season, the best option is usually to file a joint tax return. But that's not always the case. In certain financial and legal situations, it makes more sense to file your tax return separately from your spouse.

Your marital status as of the last day of a tax year determines your tax filing status and options. Couples who are legally married under state law, live together in a state-recognized common-law marriage or are still married but awaiting a final divorce decree, have two filing options under IRS rules: married filing a joint return (commonly referred to as married filing jointly), or married filing separate returns (married filing separate).

Any married couple can elect to file jointly or separately, but if you want to file separate tax returns, both taxpayers in the marriage must elect to do so, and both must agree to either itemize deductions on Schedule A or claim the standard deduction amount.

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When you elect to file separate tax returns, it doesn't result in allowing each person to use the lower tax brackets, with each paying less tax. It doesn't work that way because the taxable income brackets for married separate are exactly half of the brackets for married joint filers. For example, the 22 percent tax rate for couples filing jointly applies to income of $77,400 to $165,000. The same rate for married separate filers applies to their income of $38,700 to $82,500.

Still, if you are married, filing separate returns can be a good idea and even result sometimes in paying less overall tax. Here are some situations that can call for married taxpayers to file separate returns. 

Unreimbursed medical expenses

Unreimbursed out-of-pocket medical expenses can be claimed as an itemized deduction for amounts that exceed 7.5 percent of the taxpayer's adjusted gross income. But if a couple has AGI of $140,000 and one spouse has incurred $10,000 of out-of-pocket medical expenses, none of these medical costs are eligible because they don't exceed the 7.5 percent threshold, which in this example would be $10,500.

However, if this couple files separately and the one who incurred the medical expenses of $10,000 has AGI of just $30,000, then $7,750 of the medical expenses could be eligible. Combined with other allowable deductions (charitable donations, mortgage interest, the SALT deduction limit of $5,000 for a married separate filer), this could significantly exceed the standard deduction for separate filers, which is $12,000 for each.

You don't trust your spouse

A very good reason good reason to file separately is because you don't feel comfortable signing a joint tax return with your spouse, which both spouses must do when filing jointly. When you file jointly, you take full responsibility with your spouse, and both signers are responsible for the completeness and accuracy of the entire tax return, and each will each bear full responsibility to the IRS for any additional tax, penalty or interest due on an incorrect tax return.

If you don't want to merge your tax life with your partner, choosing the separate filing status offers a degree of financial protection because you're responsible only for your own separately filed tax return.

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Separated spouses

Another good reason to file separate tax returns is that you and your spouse live separately but aren't yet divorced. In that case, separate returns can help keep your finances separate. This can be especially beneficial if one of the spouses can qualify for head of household status because he or she is supporting the dependent children.

The bottom line is you should always consider your own situation when it comes to picking the right option for filing status. Many tax prep programs and professional tax preparers can quickly run your information through both options to determine which method would result in the lowest tax bill for you.

According to the most recent IRS data, only about 5 percent of all married taxpayers filed separate tax returns from their spouse, which seems surprisingly low.

The marriage penalty

Another closely related tax topic involving marital status concerns the so-called marriage penalty. It refers to the situation when two people with the same income would pay more tax if they get married and file a joint return than if they stay single and file separately as singles. The new tax law includes two rules that result in this marriage penalty -- one due to the new tax rates and one resulting from the new limits on deducting state and local taxes.  

Regarding the first rule, the top tax rate of 37 percent applies to married filers with income over $600,000. For single filers, the top tax rate of 37 percent applies to income over $500,000. As a result, two single filers each earning $400,000 would be in the 35 percent tax bracket because their incomes did not yet reach a top tax bracket of 37 percent. But if this couple fell in love, got married and filed jointly, and their combined income was the same $800,000, then $200,00 of their combined income would be taxed at 37 percent, which results in additional tax of $4,000.

The second rule relates to the new limit for deducting state and local taxes -- the so-called SALT deduction. The new tax law caps it at $10,000 per taxpayer. However, the $10,000 limit applies to both single filers and married couples filing jointly. Thus, a married couple can deduct only $10,000 in such taxes, but an unmarried couple filing single tax returns could each deduct $10,000 for a total deduction of $20,000. This results in a maximum marriage penalty of $3,700 for married taxpayers in the top 37 percent bracket. The penalty is lower for married taxpayers in lower brackets.