Most married couples assume they should file joint income tax returns, and usually, that’s the right choice. But under certain circumstances, there may be benefits to filing separate returns.

Bear in mind that the differences between married filing jointly and married filing separately (MFS) can be complicated. Switching from one status to the other may increase some tax breaks while reducing others. So, it’s important to analyze the numbers before determining which status is best for you. With that in mind, here are some situations in which it may be advantageous to file separately rather than jointly.

A spouse has unreimbursed medical expenses

Unreimbursed medical expenses are deductible as an itemized deduction to the extent they exceed 7.5% of adjusted gross income (AGI). If one spouse has significant unreimbursed medical expenses and relatively low income, filing separately may result in a substantially larger medical expense deduction.

Note that when filing separately, both spouses must itemize, or both must claim the standard deduction. So, this strategy only works if the spouses’ combined deductions are greater than the standard deduction for joint filers.

A spouse has QBI

Eligible business owners are entitled to deduct up to 20% of their qualified business income (QBI) from sole proprietorships or pass-through entities (partnerships, limited liability companies and S corporations). For certain types of businesses (including “specified service businesses”), the QBI deduction is phased out for owners whose taxable income exceeds certain thresholds. For 2023, the deduction is reduced for these businesses once income reaches $182,100 for single and MFS filers or $362,400 for joint filers. It’s eliminated once income reaches $232,100 for single and MFS filers or $462,400 for joint filers.

Here’s how filing separately can pay off. Let’s say Judy and Burt are married and their taxable income on a joint return is $500,000 for 2023. Judy’s sole source of income is $150,000 in QBI from a specified service business. If the couple files jointly, the QBI deduction is lost because their income is over the $462,400 threshold. But if they file separately, Judy will be entitled to the full 20% deduction because her income is below the $182,100 threshold for MFS filers.

A spouse has a student loan repayment plan

With income-driven plans, the borrower pays a certain percentage of income for a specified term after which the remaining student loan balance may be forgiven. For married borrowers, some of these plans will base loan payments on the borrower’s individual income if the spouses file separate returns.

Do your homework

Under the right circumstances, filing separate returns can generate significant tax savings for married couples. To determine whether this is the right strategy for you, consider the overall impact of MFS status on your combined tax liability.

Filing separately may save taxes in one area, but it may cost you in others. For example, separate filers can’t claim certain education credits, child and dependent care credits, or student loan interest deductions. Ask your tax advisor to calculate your tax liability for both joint and separate returns to see which approach produces the best outcome.

© 2023

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