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Married Filing Separately: Filing Status

August 17, 2011

Married Filing Separately: Filing Status

What is it?

Married filing separately is an option available to all married individuals when choosing a filing status for their federal income tax returns. Your filing status is important because it determines, in part, the amount of your standard deduction, the deductions and credits that are available to you, and the amount of your correct tax for the year. When filing a joint return, you and your spouse combine all income, exemptions, deductions, and credits. When filing separate returns, you report and pay tax only on your own income and take credit only for your own deductions and credits.

Who can file a married filing separately return?

You must be considered married for the tax year

In order to file a married and separate return for a given tax year, you must be considered married for that tax year. You are considered married for the tax year if you are married on the last day of the year.

You have not already filed a joint tax return for the year

Once you file a joint return, you cannot file an amended tax return to change your filing status to married filing separately after the due date of the tax return (usually April 15). If the due date has passed, it’s too late to change your mind.

Reporting income, deductions, exemptions, and credits on separate returns
General rule

When you file married and separate, you must include all income that you individually earn or receive. This includes wages and self-employment income. If you are deemed to own property under the laws of your state, you report any income that the property generates on your separatereturn. If you own property jointly with your spouse, you report a portion of the income generated by the property (based on your share of ownership). So, if you own the property equally, you will each report one-half the income generated by the property.

Similarly, you report only exemptions, deductions, and credits to which you are individually entitled. You may be able to claim deductions on your separate return for expenses that you paid jointly, but special rules apply, and you should refer to IRS Publications 501 and 504.

Special rules for community property states

If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) or in Puerto Rico, you will need to familiarize yourself with local law. (You may also be able to elect community property treatment under Alaska law.) The general rule in community property states is that you and your spouse split community income equally when you file separate returns. Community income includes wages earned by either you or your spouse during the marriage, as well as income from any community property. (Generally, this is property that you or your spouse acquired during marriage while living in a community property state.)

Example(s): You and your spouse live in a community property state that considers wages earned during a marriage to be community income and requires such income to be split evenly. Your spouse earns $100,000 a year in wages, while you are not employed. If you and your spouse file your federal tax return as married filing separately, each of you will report $50,000 in wages.

Caution: If you and your spouse have not lived together at all during the tax year, special rules apply, and you should consult a tax professional.

Any deductions paid from community funds must be divided evenly if you and your spouse file separately.

Advantages
You don’t need your spouse’s consent

Unlike filing jointly, you don’t need your spouse’s consent to file a separate federal income taxreturn. Further, you don’t have to wait for your spouse to file his or her own return.

Separate liability

If you file separately, you are responsible only for the taxes on your own return.

Tip: If you are contemplating separation or divorce, the importance of this factor should not be underestimated. Imagine receiving a notice from the IRS two years after your divorce is final, explaining that you owe money because your spouse didn’t report some earnings on a joint tax return that you filed.

In certain situations, filing separate returns can result in less total tax

Generally, filing separately results in a higher combined tax liability for you and your spouse than if you file jointly (see discussion in the section on disadvantages, below). However, in some circumstances, filing separate returns can actually result in a lower combined tax liability.

This occurs because some deductions are allowed only when they rise above a certain amount (determined as a percentage of adjusted gross income). Medical expensescasualty losses, and miscellaneous itemized deductions are deductible only to the extent that they exceed a specific percentage of income. Filing separate returns reduces the income on each spouse’s return. Because the income on each return is less than it would be on a joint return, the amount that these deductions have to exceed to be deductible is reduced as well.

Example(s): Ken and Sue are married, and each earns $50,000 in 2011. They pay $3,000 in state tax during the year, have deductible home mortgage interest of $11,000, and make $1,000 in charitable contributions. Sue has $10,000 in medical expenses and $5,000 in unreimbursed employee business expenses.

(1) If Ken and Sue file jointly:

Their combined adjusted gross income is $100,000 $100,000
Medical expenses are deductible only to the extent that they exceed 7.5% of adjusted gross income (7.5% of $100,000 = $7,500), so the amount of medical expenses that can be deducted is $2,500 ($10,000 – $7,500). $2,500
Unreimbursed employee expenses, like other miscellaneous itemized deductions, are deductible only to the extent that they exceed 2% of adjusted gross income (2% of $100,000 adjusted gross income is $2,000). Therefore, only $3,000 of the $5,000 in employee expenses is deductible. $3,000
All other itemized deductions total $15,000. $15,000
When these itemized deductions and personal exemptions ($3,700 each) are subtracted from adjusted gross income, Ken and Sue are left with $72,100 in taxable income for tax year 2011. $72,100
Tax $10,275

(2) If Ken and Sue file separately:

Ken:

Adjusted gross income is $50,000 $50,000
Itemized deductions (half of state taxes paid, half of home mortgage interest, half of charitable contribution) total $7,500 + $3,700 personal exemption. $11,200
Taxable income of $38,800 $38,800
Tax $5,825

Sue:

Adjusted gross income is $50,000 $50,000
Itemized deductions – Medical expenses ($10,000) are deductible to the extent that they exceed 7.5% of adjusted gross income (7.5% of $50,000 adjusted gross income is $3,750), so deductible medical expenses are $6,250 ($10,000 less $3,750). Unreimbursed employee expenses are deductible to the extent that they exceed 2% of adjusted gross income (2% of $50,000 adjusted gross income is $1,000), so $4,000 of the $5,000 is deductible. When Sue adds half of state taxes, half of the home mortgage interest, and half of the charitable contribution, her itemized deductions total $17,750. $17,750+ $3,700 exemption
Taxable income of $28,550 $28,550
Tax $3,858

Filing separately, the couple’s total tax ($9,683) is less than if they had filed jointly ($10,275).

Caution: The only way to know for sure which filing status will give you the lowest total tax is to do the calculations both ways (jointly and separately) and compare the results.

Tip: If you know that you’re going to file separate returns, consider doing a little planning. You can decide ahead of time who is going to pay what deductible expenses.
You can change your mind

If you or your spouse (or both) file separate returns, you can change to a joint return any time within three years from the due date (not including extensions) of the separate returns.

Technical Note: To change your filing status to married filing jointly, you and your spouse must complete and file Form 1040X, Amended U.S. Individual Income Tax Return.

Disadvantages
Filing separately is more complicated

Unlike filing a joint return, in which you simply combine all income and deductions, filing separate returns entails allocating income and deductions between you and your spouse. If you live in a community property state, you’ll have to split income and deductions.

Generally, filing separate tax returns results in more total tax than filing jointly

Most married couples pay more total tax when they file separately than when they file jointly. This is because the tax rate is effectively higher if you file separately. In addition, any of the factors discussed in the section on disadvantages (below) could result in greater total tax.

Caution: The only way to know for sure which filing status will give you the lowest total tax is to do the calculations both ways (jointly and separately) and compare the results.

Availability of tax credits and deductions is reduced

If you file separately, you cannot take the earned income credit (a refundable credit available to individuals who qualify based on income and family situation). Your ability to take advantage of the credit for child and dependent care expenses and the credit for the elderly and disabled is also significantly limited. Further, you can only take deductions for expenses that you actually paid, and filing separate returns affects your ability to claim dependent exemptions in some situations.

If your spouse itemizes deductions, you have to itemize as well

If you file separately and your spouse itemizes deductions, you must also itemize, even if your total itemized deductions are less than the standard deduction you would otherwise be entitled to.

Example(s): You file a separate tax return, and your spouse itemizes deductions. The standard deduction for an individual who files separately is $5,800 in 2011. You have total itemized deductions of $1,000. Since your itemized deductions do not total more than $5,800, you would normally take the standard deduction. However, your spouse itemizes deductions, so you don’t have a choice. You have to itemize, taking a deduction of $1,000.

Larger portion of Social Security benefits may be included in income

If you file separately and lived with your spouse during any part of the year, a larger maximum percentage of your Social Security benefits (85 percent) may have to be included in your income.

Negative impact on ability to take advantage of IRAs

If you file separate returns, your ability to make deductible contributions to a traditional IRA is reduced. Furthermore, your ability to contribute to a Roth IRA is limited, and for tax years before 2010 you could not roll over funds from a traditional IRA to a Roth IRA.

You can’t make spousal IRA contributions

Spousal IRA contributions are contributions made to an IRA for a nonworking spouse or a spouse with little income. You can’t make such contributions if you are filing separate returns.

Reduced ability to exclude income

When you file separately, the benefit of the $25,000 passive loss allowance for actively managed rental real estate may be reduced or eliminated. Additionally, no exclusion is allowed for interest on EE savings bonds (may also be called Patriot bonds) used for higher education expenses.

Married couples may pay more total tax than they would if filing as separately as unmarried (“marriage penalty”)

The total tax of two unmarried individuals (each filing separately as unmarried) may be less than the total tax if the two individuals were married, whether they file jointly or separately. This is particularly true when the two individuals have relatively equal incomes. This is often referred to as the “marriage penalty.”

Technical Note: The marriage penalty can occur when the tax code provides a standard deduction for married filers in an amount that is less than twice the amount for single filers, tax brackets that are wider but not twice as wide as those for single filers, and other inequities.

The Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, the Working Families Tax Relief Act of 2004, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduce (but do not eliminate) the marriage penalty for married couples.

Tip: Not all married couples experience a marriage penalty. In fact, when one spouse earns significantly more than another spouse does, filing a joint return will often result in tax savings.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com,  access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

The Retirement Group is a Registered Investment Advisor not affiliated with  FSC Securities and may be reached at www.theretirementgroup.com.

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