The Tax Play That Saves Some Couples Big Bucks
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Other couples opt into MFS because it reduces their tax bill. For example, unreimbursed medical expenses are only deductible above 7.5% of income. So if one spouse has large unreimbursed medical expenses, filing separately could lower the income of the spouse with the expenses and provide a larger deduction. Two new factors are likely boosting the trend. More than nine million borrowers with student loans now participate in income-driven loan-repayment programs, according to research by The Pew Charitable Trusts. These borrowers pay a percentage of monthly income toward their loans, with the aim of having the remaining debt forgiven after a term of years. Married borrowers in these programs are allowed to file separately to lower their income.
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Business owners also have an incentive to use MFS due to a key break enacted in the 2017 tax overhaul. Known as QBI—for qualified business income—it allows eligible business owners to deduct up to 20% of their business income on their individual returns. But 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. This means that filing separately can save taxes for affluent two-income couples in which one spouse owns a business. Married couples considering filing separately should run the numbers. MFS doesn’t treat two spouses like unmarried single filers, and there are pitfalls. Here are pointers to keep in mind, and see IRS Publication 501 for more details.
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Married couples are allowed to switch between filing separately for some years and jointly for others, and MFS filers can also later amend tax returns to claim joint status. However, joint filers usually can’t amend returns to file separately. If one spouse itemizes deductions on Schedule A, then the other must typically itemize as well. It might seem like a good idea to file separately in order to boost the deduction if one spouse has, say, substantial nursing-home expenses. However, MFS status can substantially raise IRMAA (income-related monthly adjustment amount) payments for Medicare Parts B and D because MFS filers have fewer IRMAA brackets.
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Many states require tax filers to use the same status for the state return as the federal return, according to the Tax Foundation. Filers in community-property states should also determine how state law affects federal returns using MFS status. The filer may need to submit IRS Form 8958 detailing the allocation of income and taxes between spouses.
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