Married Filing Separately (MFS)) does not regard two spouses as unmarried single taxpayers. Married couples filing separately are prohibited from claiming some tax benefits by law. They include the education credits for American Opportunity and Lifetime Learning, the childcare credit for children and dependents, and the student loan interest deduction. The amount of Social Security benefits that are taxed may increase. Moreover, both regular and Roth IRA contributions are impacted. For instance, MFS filers normally aren’t permitted to make direct contributions to a Roth IRA if they earn more than $10,000.
Other tax advantages are divided equally, with each couple receiving half. This holds true for the standard deduction, the $10,000 maximum deduction for state and local taxes, the home-sellers exemption, and the $3,000 cap on the amount of capital losses that can be deducted from ordinary income.
Married couples are free to alternate between filing jointly and separately for tax purposes, and MFS filers can later amend their tax returns to reflect their joint status. Joint filers, however, frequently cannot amend returns to file separately.
In general, both spouses must itemize their deductions if one does so on Schedule A.
By selecting MFS, a couple’s joint liability is broken, thus neither spouse is liable for the information on the other’s return. Some couples who are separated but not divorced and others who don’t want to combine their finances, even if it increases their taxes, may use this as a deciding factor.
Some use MFS because it lowers their tax obligation. Unreimbursed medical expenses, for instance, are only deductible up to 7.5% of income. So, filing separately could cut one spouse’s income and allow a bigger deduction if that spouse has significant unreimbursed medical expenses.
Student loan repayment programs with an income component now have more than nine million participants. Some borrowers save monthly by contributing a portion of their monthly income to their loans. In order to minimize their income, married borrowers in these programs are permitted to file separately.
Due to a significant tax advantage implemented as part of the 2017 tax reform, business owners are also encouraged to use MFS. Qualified business income, or QBI, enables qualified business owners to write off up to 20% of their business revenue on their individual tax returns. However, to escape restrictions, the owner’s 2022 taxable income must be less than $340,100 for married couples filing jointly or $170,050 for single or MFS taxpayers. This means that for wealthy two-income couples when one spouse owns a business, filing separately can result in tax savings.
Due to the fact that MFS filers have fewer IRMAA brackets, having the MFS status can significantly increase IRMAA (income-related monthly adjustment amount) payments for Medicare Parts B and D. Run the figures, then.
According to several states, tax filers must use the same status for both their state and federal returns. Filers in states with community property laws should also use MFS status to ascertain how state law affects federal returns.