Hello All – one of the questions we are asked from time to time is if it makes sense (from a tax perspective) for married couples to file as MFS rather than MFJ. This is a multi-faceted question, and should be considered carefully. Please read on to see what some of the factors and considerations are when weighing this decision.
A very obvious element of this analysis is whether or not there is a prenuptial agreement in place for a married couple – when there is a prenuptial agreement in place, using the MFS filing status helps to keep income and assets neatly separated.
Note that even if there is a tax disadvantage to MFS, there may be some other advantage gained by filing with that status.
Usually, the best way to determine advantage is to run both scenarios – software allows us to conduct this analysis relatively quickly.
When it is potentially better to choose MFS – there may be other considerations – so please discuss with us if you’re unsure:
Concern about accepting full liability for taxes now (whose income is it, really?) or in the future as a result of a tax audit.
Concern about accepting liability related to unpaid child support or Federal student loans.
If taxpayers live in a state where there is threshold for high income earners (i:e surtax for income in excess of $1M) – this is especially meaningful in light of the SALT limitation.
Residency and sourcing issues – avoid being taxed in a higher tax rate state – if there is a way to determine that the income clearly belongs to one spouse rather than the other, this may create a situation where MFS provides some advantage. This is also a factor if there is a passive activity loss that can potentially offset income, having too much income can force a suspension of the passive activity loss.
One spouse with high / significant medical expenses – here, again depending on the relative amounts of income and expense, MFS may be better, due to itemizing deductions – however, then both must itemize.
Spouse lives apart with dependents – can one qualify as head of household?
A taxpayer’s federal tax obligations are determined via federal tax law but property rights are determined by state law (Community property / real estate laws/ federal tax law as relates to the organization of an entity) – this is a key factor to consider.
The following credits are lost via MFS
- EITC
- Dependent Care Credit
- American Opportunity Tax Credit / Lifetime Learning Credit
- Premium Tax Credit (unless certain exceptions apply)
- Student Loan Interest Deduction
- Partial Social Security Exemption / Exclusion Benefit
- Any exclusion of interest from Series EE or US Savings Bonds used for education expense $25k PAL allowance
- Possible loss of IRA deduction
You’ll note from the above that there are many considerations and thus it is a good idea to assess this question from various angles.