
More married couples are filing separate tax returns to save money and for other reasons, The Wall Street Journal reported.
While the number of married taxpayers filing separately (MFS) is still a small percentage of the 55 million married couples who file jointly, the number of MFS filers rose from 2.6 million to 3.9 million annually in the decade ending in 2020, the latest available data from the IRS showed.
There are many reasons for this, tax advisers told the Journal. One reason is to achieve a reduced tax bill, such as when one spouse has large unreimbursed medical expenses, which are only deductible above 7.5 percent of income. In such a situation, filing separately could lower the income of the spouse with the expenses and provide a larger deduction.
Another reason is that MFS severs joint liability, meaning that each spouse is not responsible for the information on the other’s return. Separated, but not divorced, couples do this, as they may not want commingle their finances, even if it means higher taxes.
Two new factors may also be responsible.
Married people who repay their student loans via an income-driven loan-repayment programs pay a percentage of monthly income toward their loans and are allowed to file separately to lower their income.
Eligible business owners may deduct up to 20 percent of their qualified business income (QBI) on their individual returns, a provision of the 2017 Tax Cuts and Jobs Act. To avoid limits, the owner’s 2023 taxable income must be below $182,100 for single or MFS filers, or $364,200 for couples filing jointly.
That business deduction provides an incentive to file separately, as it can save taxes for affluent two-income couples in which one spouse owns a business, Adam Markowitz, a tax professional near Orlando, Fla., told the Journal. “The QBI deduction can be too valuable to lose, even if a filer gives up other tax breaks,” he adds.
Still, there are differences for MFS taxpayers. By law, married couples filing separately cannot take certain tax breaks, and contributions to traditional and Roth IRAs are affected. Married couples can switch between filing separately for some years and jointly for others, and can later amend tax returns to claim joint status, but they usually cannot amend returns to file separately.
Taxpayers should be aware that the MFS status can substantially raise income-related monthly adjustment amount (IRMAA) payments for Medicare Parts B and D because MFS filers have fewer IRMAA brackets. Also, many states require tax filers to use the same status for the state return as the federal return, according to the Tax Foundation.