Married Filing Separately As an Option

It is nearly always a very bad idea for married taxpayers to file separate returns. However, if both spouses have similar income levels but one spouse has a much higher amount of deductible expenses, it may be advantageous to file separately. This would also be the case if a lower-earning spouse has a high amount of deductible expenses.

For example, medical expenses are deductible only to the extent that they exceed 10 percent of the taxpayer's adjusted gross income (AGI) in 2013 for many taxpayers. (This threshold increased from 7.5 percent to 10 percent, starting in 2013, but it remains at 7.5 percent if the taxpayer or spouse is over age 65.) If one spouse had the majority of the family medical expenses, the 10 percent threshold may be easy to overcome when only that spouse's income is counted. A similar situation exists for miscellaneous itemized deductions, including employee business expenses (2 percent of AGI threshold) and nonbusiness casualty losses (10 percent of AGI threshold).

However, keep in mind that if one spouse itemizes deductions, the other will have to itemize as well! The other spouse can not claim a standard deduction. This could mean that the second spouse winds up with few or no allowable deductions. Therefore, the difference must exceed the lost standard deduction for this strategy to make sense.

Another wrinkle to consider is that beginning in 2013, taxpayers whose adjusted gross income (AGI) exceeds a threshold amount must reduce the amount of allowable itemized deductions by the lesser of: (1) three percent of the excess over the threshold amount, adjusted annually for inflation; or (2) 80 percent of allowable deductions ( Code Sec. 68). No reduction is required in the case of deductions for medical expenses, investment interest, and casualty, theft or wagering losses. If you're a high-income earner, it may also be important to consider how separate filing alters the impact of the limitation on itemized deductions faced by high-income taxpayers.

If you have dependents and file separately, you may divide their exemptions between yourself and your spouse, but no single exemption can be split.

Save Money If you have numerous dependents and one spouse claims them all, you might come out ahead. Just make sure that the spouse who claims the exemptions can meet all the tests for claiming each dependent ; generally this would require that the spouse claiming the exemptions earned enough money to provide more than one-half of the dependents' support.