Should I File My Taxes Separately?

Q:        My neighbor says he and his wife file their taxes separately and it saves them a bunch of money. What is that? And should we do it?

A:         Let’s first discuss what filing separately is. The IRS allows you and your spouse to file your taxes combining all of your income and deductions on one tax return. It does not matter who earned the money or who spent the money. It also means you are both equally responsible for the taxes.

Or, you can elect to file separately. You claim your income and deductions. Your spouse claims his/her income and deductions. Your tax is your tax. Your spouse’s tax is his/her tax.    

There are two main reasons to file separately.  First, there may be legal & liability issues with your spouse. This is the main reason I see people file separately. Second, if it is going to save you tax.

Regarding the legal & liability issues…if you are filing jointly and your spouse is doing unscrupulous things on your tax return, you are (most likely) equally responsible for those unscrupulous doings as your spouse.  If you file separately, you are not responsible for those doings and the related taxes and penalties….or jail time.

Another time it may make sense to file separately for liability reasons is if you are separated from your spouse. Similar to above, if you file jointly, you are both equally responsible for the taxes on that joint return. If you do not want to be responsible for their taxes…or let them have any of your refund…file separately.

So, will it save you taxes? Doubtful. Yes, there are some situations where filing separately makes sense. But given the current rate structure, those situations are rare. I see 1-2 couples each year that filing separately saves taxes.

So, when can it happen? An example is if you have a large capital gain and little other income and your spouse has lots of income, filing separately may help lower your capital gain tax and overall taxes.

Some credits (like the first time homebuyer credit) and deductions are limited by income levels. If one of you makes substantially more than the other and your combined income exceeds those limits, you would lose the credit/deduction. It may be possible for you to file separately and the spouse with the lower income could still qualify for the credit.

So, go be nosy and find out what unusual situation your neighbor has that filing separately saves them taxes.