The most popular reason for filing Married Filing Separate is to lower Student Loan Payments. The tax benefits listed below are less than the lower student loan payment. A common rule is that one taxpayer’s income is substantially different than the other taxpayer. If both taxpayers have approx. the same income, there usually are no savings, only a loss.
What are the disadvantages of filing Married Filing Separate on your individual tax returns?
The IRS has established special rules for taxpayers filing as Married Filing Separate on their tax returns. Clearly, the assumption is that these taxpayers would usually pay more taxes on a separate return than if they used another filing status such as married filing jointly or head of household. The main disadvantages are as follows;
1. The Married Filing Separate’s tax rate generally will be higher than it would be on a joint return, however, filing MFS may result in other savings, ie. Student Loan repayment.
2. The Married Filing Separate taxpayer’s exemption amount for figuring the alternative minimum tax will be half that allowed to a joint return filer.
3. The Married Filing Separate taxpayer cannot take the credit for child and dependent care expenses in most cases, and the amount that you can exclude from income under an employer’s dependent care assistance program is limited to $2,500 (instead of $5,000 if you filed a joint return).
4. The Married Filing Separate taxpayer cannot take the earned income credit.
5. The Married Filing Separate taxpayer cannot take the exclusion or credit for adoption expenses in most cases.
6. The Married Filing Separate taxpayer cannot take the education credits (the Hope credit, American opportunity credit, and lifetime learning credit), the deduction for student loan interest, or the tuition and fees deduction.
7. The Married Filing Separate taxpayer cannot exclude any interest income from qualified U.S. savings bonds that you used for higher education expenses.
8. If the taxpayer lived with his or her spouse at any time during the tax year, then that taxpayer;
a) cannot claim the credit for the elderly or the disabled.
b) the taxpayer would have to include in income more (up to 85%) of any social security or equivalent railroad retirement benefits you received, and
c)the taxpayer cannot roll over amounts from an eligible retirement plan (other than a Roth IRA or designated Roth account) into a Roth IRA.
9. For the Married Filing Separate taxpayer, the following credits and deductions are reduced at income levels that are half of those for a joint return:
a)the child tax credit,
b)the retirement savings contributions credit,
c)Itemized deductions, and
d)the deduction for personal exemptions.
10. the taxpayers capital loss deduction limit is $1,500 (instead of $3,000 if you filed a joint return).
11. For the Married Filing Separate taxpayer, if his or her spouse itemizes their deductions on schedule A, then that taxpayer cannot claim the standard deduction. If you can claim the standard deduction, your basic standard deduction is half the amount allowed on a joint return.
12. Federal amounts carry to WI. In addition the Married Couples Credit (up to $480) is eliminated, and the School Property Credit is reduced by 50%.
The Married Filing Separate taxpayer’s first-time homebuyer credit is limited to $4,000 (instead of $8,000 if you filed a joint return). If the special rule for long-time residents of the same main home applies, the credit is limited to $3,250 (instead of $6,500 if you filed a joint return).
Advantages for filing Married Filing Separate are basically in two areas. (1) To reduce student loan payments (2) Legal issues