You may have heard that when it comes to tax-savvy moves, filing joint income tax returns with your spouse is one of the best ways to save money. And, often, that’s true. “In most situations, it makes the most sense due to the larger standard deduction and credits available to joint filers,” says Kristian Finfrock, founder of Retirement Income Strategies in Madison, Wis.
But filing jointly isn’t always the best policy. For instance, if one spouse owes back taxes or child support, which can be garnished from tax refunds, it may be in your best interest to file separately. The same goes if you’re worried your spouse is being dishonest about his or her income (which can come back to bite them in a lot of ways).
Here are three more common scenarios when it may pay to file taxes separately:
If one spouse’s self-employment or side hustle income has increased a lot since last year, they’re likely to owe more to Uncle Sam than you might’ve budgeted. That spouse will be responsible for paying self-employment taxes of 15.3 percent and making estimated quarterly tax payments throughout the year. It’s common to underestimate or overlook these payments altogether, especially when side income is growing.
If you file jointly, the refund of the spouse with a regular 9-to-5 could decrease or disappear entirely to cover the other’s self-employment taxes. Failing to submit estimated quarterly taxes can also result in having to pay interest. So if you’re counting on a refund to cover an upcoming expense, you may be able to preserve it by filing separately.
If you’re not sure whether filing separately or jointly is best, calculate both, Finfrock says. And ask for help if you need it. “A good tax advisor will help you legally and morally look for ways to reduce the IRS bite,” she adds.
The income-based student loan repayment plan is a federal program that sets your monthly student loan payment at an amount intended to be affordable based on your family size and reported income. If you file taxes separately, your reported income will be lower than if you show combined earnings—resulting in a lower student loan payment.
This is particularly important for those who may qualify for the Public Service Loan Forgiveness (PSLF) program. Eligible government and nonprofit employees must be on an income-based repayment plan and make 120 qualifying payments. To maximize this benefit, it makes sense to minimize the amount of those 120 payments as much as possible by filing separate tax returns.
If there’s a large income gap between you and your spouse, and the lower-earning spouse qualifies for significant itemized deductions, consider filing separately, Finfrock says. That’s because there are income caps that you may meet when combining incomes that just one income would fall short of.
For example, qualified out-of-pocket medical expenses cannot be deducted for tax year 2018 unless they exceed 7.5 percent of your income. So, say one spouse earns $80,000, the other earns $40,000 and you spent $7,500 on medical expenses last year. If you file jointly, you would not qualify for the deduction. However, if you file separately, the $40,000 earner could claim the deduction, as medical expenses would well exceed 7.5 percent of that income.
For informational purposes only. Acorns does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns.