Money Matters

Couples who file taxes separately face disadvantages

December 22, 2012 

Q. I make considerably more than my wife and as a couple we will make over $250,000, the new definition of wealthy for a married couple. If we were single, both of our taxable incomes would be under $200,000. I’ve suggested we divorce, but that didn’t go over well with my wife.

If the proposed tax rates go into effect and I can’t get agreement on the divorce, should we consider filing married but separately?

A sham divorce could be construed as a form of tax evasion; check with a tax professional or an attorney. For a divorce, you’d want to make sure each of you is protected on the outside chance that one of you actually abandons the other. You’d also need some advice as to how property would be divided to make the most of filing as single or married filing separately. If you are still married as of Dec. 31, your only option will be to file jointly or MFS.

In rare circumstances, electing the filing status of MFS may result in a lower tax bill. If one spouse has significantly higher income than the other, you will generally pay less tax electing file married filing jointly. The joint filer tax brackets are twice as wide as the MFS brackets. This difference probably will remain if the tax brackets change for those with higher income.

When one spouse has a much higher income, filing jointly results in more of his or her income being taxed at lower rates. If incomes are roughly the same, you will generally pay the same amount of tax under either filing status. If one of you had high medical expenses, casualty losses, employee business expenses or other miscellaneous expenses subject to a percentage limitation based on adjusted gross income, MFS may make sense because these expenses will be limited by the AGI of only one spouse.

Another good reason for MFS is liability: Each spouse who signs a joint return is liable for the accuracy of the return, and the payment of any tax or penalties owed. A spouse filing separately is not responsible for the other spouse’s tax return and any tax owed.

Some of the disadvantages of electing to file separately:

• No ability to deduct student loan interest.

• Credits such as earned income, child care, adoption, hope scholarships and lifetime learning are lost.

• Roth IRA conversions are not allowed unless spouses have lived apart for the entire year.

• Contributions to traditional or Roth IRAs are not allowed if modified AGI is at least $10,000.

• Capital losses can’t be combined; each spouse is limited to a $1,500 loss deduction.

• The exemption for the alternative minimum tax is lower.

• If one spouse itemizes deductions, the other also must itemize.

• Spouses cannot claim the standard deduction.

Assuming the divorce doesn’t occur, you may want to prepare your 2012 taxes using both the MFS and MFJ elections and see which provides you with the lower tax bill.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624

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