The other day I came across this situation. It went something like this:
A woman was a single mother and filed head of household on her taxes for years.
She got married, and while they had a joint bank account for some shared expenses, most of their finances were separate from each other.
She had information which made her believe she must file taxes as married filing separately because they kept some of their bank accounts separate, and that therefore there was a marriage penalty as the amount of tax they collectively owed went up when filing Married Filing Separately compared to if they were filing jointly.
It’s an interesting misunderstanding, and one that I’m sure must come up commonly with people who are deciding whether to merge or separate their finances in marriage. In The Feminist Financial Handbook, we talked about the importance of keeping at least some money separate, so I do want to address it.
Separate Finances vs Married Filing Separately
When you get married, you might decide to open all your bank accounts with both of your names on them. This strategy is ‘completely’ joint. It’s traditional, but I’m not a fan. With divorce rates hovering around 50% since the 1980s, it just seems ill-advised. We insure against things that are far less common than divorce. Some people love this method, though.
The other extreme is keeping all of your bank accounts, loans, etc. separate from each other. The other person doesn’t have permission to make withdrawals from deposit accounts, and their credit score isn’t impacted if you miss a payment on a loan that’s in your name only.
The final strategy is a mix of the two, with maybe a joint account for shared expenses, but each partner still maintains at least one separate account in their name only. This is probably the most realistic approach, and still provides you with a little self-insurance.
My colleague Choncé Maddox recently wrote an excellent piece breaking down different opinions on each strategy for Good Housekeeping.
Here’s the important part: Whether you have joint or separate banking practices within your marriage has no bearing on whether or not you file Married Filing Jointly or Married Filing Separately.
Married filing jointly is almost always better than married filing separately
There are advantages to filing your taxes under the Married Filing Jointly status rather than the Married Filing Separately status. Just because the standard deduction for Married Filing Separately is 50% of the standard deduction for Married Filing Jointly does not mean that all other numbers are split down the middle.
Here are some of the line items that negatively impact you if you choose to file Married Filing Separately:
- Actual tax. Even before you start accounting for any specific tax credits, the actual amount of tax you’ll owe is often higher when you file Married Filing Separately. That means even if your taxable income is the same, you’re extremely likely to pay more than if you filed Married Filing Jointly. The difference is particularly pronounced when there’s a wide income split between both spouses. The degree of impact is much less if you both earn about the same amount of money, but it’s still usually cheaper to file Married Filing Jointly.
- Child tax credits. When you file Married Filing Separately, only one of the parents can claim the children as dependents. This can significantly impact the Child Tax Credit and the Additional Child Tax Credit in a bad way, as you won’t be able to claim the full credit without both spouses on the same return.
- Other tax credits. When you file Married Filing Separately, there’s an array of credits that are just plain off limits in most situations. They include the EIC, the Child and Dependent Care Credit, and the American Opportunity for Lifetime Learning credit. This is not an exhaustive list, and your individual financial situation may or may not make you ineligible. But in most cases, ineligibility is the default.
Again, this is not a comprehensive list, but you can see pretty quickly how Married Filing Separately comes with some big negatives.
When would I file separately?
For most people, Married Filing Jointly is the smarter financial decision. However, there are a few scenarios where Married Filing Separately can help you. They’re few and far between, but they do exist. They include:
- Liability concerns. Whether or not you’re going through a divorce, if your spouse is doing something shady with their finances you may choose to file separately. It doesn’t necessarily remove all your liability depending on what’s going on, but it does provide at least some minor protection on the tax side of things.
- You have federal student loans. If you’re on an income-based or income-contingent repayment plan for your federal student loans, filing separately discludes your spouse’s income from your repayment calculations. You may still end up paying more in taxes, but you may decide it’s worth it for the lower student loan payments depending on your numbers.
- Significant medical expenses. If either you or your spouse have significant medical expenses, filing separately may make sense. That’s because you can deduct medical expenses if they’re more than 7.5% of your adjusted gross income (AGI). We’re talking massive medical expenses here — the itemized deduction would have to be more than the standard deduction for this strategy to make sense.
This isn’t an exhaustive list, but does cover some of the most common situations.
Are marriage penalties real?
Oh, absolutely. They’re just not real in this particular way.
You’re more likely to face a marriage penalty if you’re low-income. Households that are better off typically incur tax benefits after marriage, but it doesn’t work that way if you bring in less money.
‘Marriage penalties’ do not refer to the choice to file Jointly or Separately when you’re married. Instead, they refer to the penalty low-income or single-parent households face when they do get married versus filing as an unmarried head-of-household. It’s the act of marriage itself that inflicts the penalty — not the elective choice of filing status within the marriage.
How do I get help filing my taxes?
If you came in with any of these same preconceived notions, you’re going to want to sit down with a tax professional this tax season. You don’t want misconceptions to lead you to a higher tax bill (or an audit.) Plus, a tax professional can help you figure out if you truly are one of the exceptions that would merit a Married Filing Separately status.
There are ways to file your taxes for free using programs like VITA or Free File. (Most American households qualify for Free File.)
If you don’t qualify for those programs, be sure to sit down with someone with letters after their name like EA or CPA. That guy at H&R Block that wants you to pay him to file your taxes likely doesn’t have these letters after his name. He could just be a seasonal worker that received some seasonal training to handle the most common tax returns — but works at the local Walmart the rest of the year. He might not have the expertise to get the nuances of your individual situation 100% right.
