There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.
Jeremy Wells: Hey there, it's Jeremy Wells, and welcome back to the show. Today we're going to talk about a topic that comes up every now and then. And actually I think it's a topic that we should, as tech professionals be thinking about a little bit more, especially when we're in the heat of tax season when we're preparing returns. And that's [00:00:30] filing statuses for married couples. The way the rules get interpreted and applied in practice are actually, in some cases, the reverse of what the rules really are. And I think there's a lot of misunderstanding here. So I want to try to clarify some of these, especially when it comes to thinking about a married couple filing jointly versus separately. There are a lot of ideas out there, and most of them are sound, but they're just not based on understanding the actual rules as they're written. So [00:01:00] let's jump right into that. When a married couple is going to file their tax returns. In general, the better situation from a tax perspective for them is to file jointly. There's a preference in several different provisions within the tax code as far as how that joint 1040 is going to look compared to each spouse [00:01:30] separately filing a 1040. There are some preferences there that are going to most of the time, wind up with a better tax result for that couple filing jointly, as opposed to filing separately. And we're going to talk about some of those disadvantages of filing separately here in a minute.
Jeremy Wells: But because of that, because the preference, uh, is pushed in the tax code to [00:02:00] to toward a married couple filing jointly. That sort of becomes the default position. In fact, a lot of tax software looks like this. The ones I've used and just the assumption by tax payers, as well as by return preparers that if a couple gets married, we're just going to prepare and file a joint return for them to the point at which we have to backtrack on that and reevaluate [00:02:30] the situation whenever we are told by the taxpayers or whenever some situation comes up. That might lead us to want to consider filing separate returns instead. But this is actually the opposite of the way the code is written. If both spouses agree to file jointly under code section 1613, 13. Then they can file a joint return. See, that's [00:03:00] what often gets misinterpreted. And I think misspoken is that the joint return, although it tends to produce the better result from a tax perspective. For that couple, it's not the default. Actually, the default really is each spouse filing a separate return. What code? Section 6013 A allows a married couple to do is to jointly elect to file [00:03:30] this joint return. If either one of them doesn't want to file a joint return, then neither one of them can. They both have to file separately. So the way I often describe it, when I'm talking to other tax professionals or when I'm talking to taxpayers, is that filing separately is actually the default, that if it weren't for code section 13, excuse me, if it weren't for code section 6013, then we would have all [00:04:00] married couples filing separate returns.
Jeremy Wells: In fact, I've even seen some argue that that might be the way it should be. Uh, that we should maybe eliminate some of the preferences toward filing jointly. And one way of maybe simplifying things, because of the differences between filing separately and filing jointly, and some of the issues with the way the IRS and its processing computers are able to handle joint [00:04:30] returns. Uh, maybe we should just have everyone filing separately. Now, I don't necessarily agree or disagree with that position. I've just seen that argument made before. But what I think is interesting is that because most married couples in the US get a better situation, a better result by filing jointly, that has become the default to the point at which I've seen a lot of conversations among tax professionals where because a couple wants to file separately or they have some sort of situation [00:05:00] that would lead them to consider filing separately. This raises questions. In fact, some of these situations that might be driving the consideration of filing separately as opposed to jointly, are actually non-tax factors that are affecting that decision. And it might actually lead to a result where the taxpayers would pay more in tax by filing separately, but because of other factors [00:05:30] or even those non-tax factors, financially they wind up with a better result.
Jeremy Wells: We'll look at some of those situations as well later on, as to when a married couple might want to consider filing separately, even when that might mean paying a little bit more in tax. So again, let's let's step back to basics here. In general, a married couple can choose whether [00:06:00] to file separately or if both of them choose to elect file jointly. Under code section 6013, they can elect to file a single joint return. And that joint return is going to combine all of the different income, deductions and credits for the two individuals onto one return, as if it was one individual that actually earned all that income, had all those credits and deductions, [00:06:30] for example. There is one exception to a married couple either filing as jointly or separately, and that is if one or both of them qualifies to file as head of household. Now, that's, uh, beyond the scope of this topic here. Um, And it's probably worth having a whole episode on Head of Household and maybe comparing single and head of Household to married filing [00:07:00] separately. And, you know, head of Household just generally is kind of a kind of a weird filing status. And it's one that usually throws me for a loop when I'm preparing returns. It's one of those that I have to remember, especially when I am dealing with a taxpayer that isn't filing a joint return.
Jeremy Wells: A couple that isn't filing a joint return, and then an individual. It's one of those situations where I have to remember to go back and check whether they qualify or not for head of household, but in [00:07:30] general, if the taxpayers if either one of the spouses can qualify as head of household, then it's possible, uh, for uh, one or both spouses to to file that way. It's kind of a weird fact, pattern and situation that's going to lead to that possibility. But it can happen. So other than that, other than one or both of them qualifying for head [00:08:00] of household, a married couple is either going to file separate returns or they're going to file a joint return. I have seen errors in some of these are taxpayer errors. Some of them are tax preparer errors where the individuals that are a married couple somehow filed single returns. And that's just straight up an error. Uh, there's really no way for that to be able to happen. So really, the only three statuses [00:08:30] that are possible when you have a couple that is married and considered married for tax purposes is for them to either each file a separate return married filing separately file one joint return, or if they file separately and one or both of them qualifies and they could file as head of household. Those are really the only options you've got when you've got a married couple.
Jeremy Wells: Now, if they file separately, then each spouse individually will claim [00:09:00] his or her own income, deductions, credits and exemptions. We we don't have exemptions right now under Tax Cuts and Jobs Act. However, when tax cuts and Jobs Act sunsets at the end of 2025, those might come back for tax year 2026. So we'll have to see what happens there. But in general, if one spouse did not have any gross income and was not the dependent of someone else, then in that case, [00:09:30] uh, when we have personal exemptions, uh, the other spouse could claim an exemption for that spouse. In general, in general, when you have a married couple, uh, neither spouse is claiming the other. This is another error that will pop up occasionally is where you have a spouse that doesn't earn an income, and so you'll see an extra deduction on the return, uh, an extra dependent listed on the return. And that's absolutely, [00:10:00] uh, not right. Uh, a spouse is never a dependent on the return. However, uh, you can have a case once we have exemptions. Again, you can have a case where if the couple is filing separately and one spouse, uh, does not have any gross income reported on his or her separate return, then, uh, and that spouse can't be claimed by a dependent of someone else. Then you could have a situation where the other spouse can claim an exemption [00:10:30] for that spouse. If we have exemptions, uh, again in the future, we don't currently have those personal exemptions.
Jeremy Wells: Uh, but like I said, unless Congress extends Tax Cuts and Jobs Act or the provisions in there or passes some, uh, way of, uh, reenacting those provisions, then starting again with tax year 2026. We could have the return of personal exemption. So this might be something that comes back up in the future. I [00:11:00] want to talk about the reasons why joint returns have, for most situations become the default with married couples. Again, there are there are several provisions in the tax code that push married couples toward preferring a joint return over filing separate [00:11:30] returns. And another way to think about this is these provisions create disadvantages to filing separately. It might make sense It for various reasons, for a married couple to want to file separate returns. And we'll talk about that in a minute. But as the taxpayer as the tax advisor for the couple, it's important to understand that both of those options, [00:12:00] either filing one joint return or filing a separate return for each spouse, that both of those options are available, and that ultimately it should be the taxpayers decision as to which way they want to go with that. Every tax software is different, but in the tax software that my firm uses, we have the option to print a married filing joint versus married filing worksheet, [00:12:30] and it's essentially a summary for that couple. So when we prepare the return we initially prepare it as a joint return.
Jeremy Wells: And then we'll also add that joint versus separate worksheet. And what this does is as we're entering items into the software, we identify those items as either belonging to the first spouse, the [00:13:00] second spouse or joint. And depending on the item and depending on how your software handles it, those joint items are usually split evenly between the two spouses. And so what you'll wind up on this worksheet is essentially four columns. The first column will be the joint return results. And you'll see that as sort of a summary of the return. So the rows down the columns will be the different sources [00:13:30] of income, the total income, the adjustments AGI taxable income tax and those sorts of items down the rows. Arose. So that first column will be the joint return. The second and third columns would be each spouse individually, as if they had truly filed two completely separate returns. And then the fourth column will be the combination of those two. [00:14:00] So what the combined result of filing two separate returns for both spouses would be. And this essentially gives you a way to go back and compare from that first column what the joint return result looks like. And from the fourth or the last column, what two separate returns looks like. And nine times out of ten, probably even more often than that, there will be a statement right in the middle [00:14:30] of that worksheet that shows the savings from married filing jointly.
Jeremy Wells: And depending on the couple and depending on their income and how things shake out. Usually it's not a not an insignificant amount of money. A lot of times we see several thousand dollars. For example, um, you know, for a, for a typical, uh, upper working, lower middle class married couple maybe where both spouses are working. And so [00:15:00] you'll see that there is a quantifiable, uh, tax difference between filing jointly and then filing separately. Now, if you have that option in your software, I recommend using it. I like using it not just because we can show it to the taxpayers, although that's an important part of it, but it also serves as a good check when we're reviewing the returns. Sometimes we [00:15:30] will go back through the return and realize that we may have missed something, especially, uh, with the two year summary, It can become obvious when something's been left out. So, for example, if last year's return showed some dividends, income and this year's doesn't. That might lead us to go back to last year's brokerage statements and see if those stocks were sold that were producing those dividends. And if not, why didn't we get some [00:16:00] dividend income this year, too, for example? And so those sorts of year over year differences are good for checking and reviewing returns, but also using that married filing joint versus married filing separately. Comparison can show us where maybe we have missed some items for one or the other spouse.
Jeremy Wells: Or maybe we have mislabeled some of those items as belonging to one spouse when it actually belonged to the [00:16:30] other spouse. One place that this can really cause problems and I have some experience with this is the, uh, over payment of Social Security tax. When a taxpayer has multiple w-2s because employers don't track how much income you have from other employers, different companies, payroll departments don't talk to each other. [00:17:00] So it's possible for a taxpayer to move jobs midyear and be paid enough wages from two different companies. Uh, or maybe they just manage to work two different jobs at the same time, but it's possible for that taxpayer to have earned in total more wages than the Social Security cap. But because the wages were earned from two different employers, the [00:17:30] wages for Social Security tax purposes, uh, exceeded the threshold, and so the amount of Social Security tax withheld exceeded the amount that should have been assessed on just up to that cap and so on the tax return, you get a reconciliation of the overpaid Social Security tax. Now, it's possible that if you have a married couple and both of them have W-2 jobs, it's possible. [00:18:00] And feel free to ask me how I know this. It's possible to mark multiple w-2s as earned by the same taxpayer, and therefore trigger that calculation of excess Social Security tax, which might either reduce a balance due or increase a refund, when in fact, uh, those w-2s weren't correctly assigned to the taxpayers.
Jeremy Wells: And that Social [00:18:30] Security overpayment of Social Security tax is actually calculated on an individual basis, not on a joint return basis. So you could have two spouses that collectively are earned enough to exceed the Social Security cap, but that's on an individual basis. It's not for the joint return. So if you properly allocated those w-2s you, there would not have been a triggering of that excess Social Security tax paid. [00:19:00] Unfortunately, a few times more. More than I care to admit. I have mislabeled those w-2s and that's triggered a calculation of that excess Social Security tax. It works out fine. Generates a notice from IRS. You explain to the taxpayer what happened. Unfortunately, uh, that wasn't a correct item. You actually now owe some of that refund back, or you owe a little bit more than you thought you did and those kinds of situations. [00:19:30] It's annoying. It's problematic. Dramatic. We've set up review checks to make sure that we don't do that again. But that's one example of a way that on a joint return, that comparison of the, uh, joint versus separate worksheet can actually help work through, uh, whether or not we've made an error like that, if we see that all of the wages are falling [00:20:00] under one spouse and none of the wages are reported under the other spouse on that joint versus separate worksheet, that's part of our review check.
Jeremy Wells: And it would lead us to go back and check and make sure that we properly assigned all of those w-2s that we've entered in tax software to the correct spouse. So that's one of several reasons why I'm a big advocate of producing that worksheet, even if the, uh, taxpayers [00:20:30] aren't that interested in it, or even if we're not really going to consider, uh, filing separate returns. Now, if you are in a situation where you might want to consider filing a separate return for some of the reasons we'll talk about later, then it's especially helpful to have that worksheet. Typically, that worksheet is not 100% accurate as far as what the two separate returns will end up looking like. They're usually still some additional adjustments that have to be made. Uh, for example. But uh, in [00:21:00] general, that worksheet is just a good way to kind of help start thinking about things and to also check your work. So let's look at some of the disadvantages of filing separately, and some of the reasons why the default for a married couple has become, uh, is usually, uh, filing a joint return instead. First of all, the tax rate is generally higher with a uh, with a [00:21:30] with separate returns. Tax rates tend to be lower on a joint return. If you look at the tax brackets year over year, and they do adjust due to inflation and they can adjust for legislative reasons.
Jeremy Wells: So for example, we've already talked about tax cuts and Jobs Act tax cuts and Jobs Act lowered tax rates pretty much across the board. But the tax rates for a joint return tend [00:22:00] to be lower across the brackets than the rates for separate returns. Also, those brackets tend to be a little bit larger for joint returns than for separate returns. So what ends up happening is that you have more income being reported at a bracket with a relatively lower rate. Now, the rates themselves aren't necessarily [00:22:30] lower, but because those brackets are larger, what you wind up with is more income being taxed at lower marginal rates. And so the result is a relatively lower effective rate across the returns. And again, this is something that can be pretty easy to see when you're looking at that joint versus separate worksheet. So that right off the bat is [00:23:00] typically one of the most common reasons you'll hear for why joint returns are preferred to married filing separate returns. In general, a joint return will will result in a smaller tax liability for the same total amount of income than you would get with separate returns. Another reason that we have. Another disadvantage [00:23:30] of filing separately is that the exemptions. For the alternative minimum tax is half of that allowed for a joint return. Now Altmann tax is not something that comes up a lot in the returns that I work with. It comes up every now and then, especially when we have, for example, some clients that have some, uh, incentivized stock options, for example, some ISOs that they're exercising those sorts of things.
Jeremy Wells: Generally, [00:24:00] AMT isn't much of an issue, but in those situations, we have to be even more careful about the calculations of the tax between filing jointly versus filing separately. So, for example, if we've got a married couple and one of them is working for an employer where they have some ISOs, that would be an item for the AMT calculation that we might need to pay a little bit extra attention to. Into. If for some reason that couple is considering filing jointly [00:24:30] versus separately, those exemption amounts are cut in half for separate returns. And that's a theme that you're going to see across a lot of these disadvantages is items are either just unavailable for separate returns or if they are available, the and there's some threshold or some there's some amount the amount is cut in half. Now sometimes that's not an issue. Sometimes it is. We'll look at some more examples of this here as [00:25:00] we keep going through these disadvantages. In most cases, the credit for child and dependent care expenses is not allowed for separate returns, whereas it is allowed for joint as well as single or head of household filers, but for separate returns, unless there's an exception. The credit for child and dependent care expenses isn't allowed. The exceptions include a legal [00:25:30] separation under a divorce or separate maintenance decree, and that comes straight out of IRC section 20 1E3.
Jeremy Wells: So unless that couple has a legal separation, uh, or a separate maintenance decree, and a taxpayer lives apart from the spouse during the last six months of the year. Okay. And then you've got to have a spouse who furnishes over half the cost of maintaining a household during the year, and with whom that qualifying [00:26:00] person lives for more than half the year. Uh, and that's under IRC section 20 1E4. So you've got two exceptions here. The first one is you've got that legal separation under a divorce or a separate maintenance decree. That's 20 1E3. And then under 20 1E4, you've got a taxpayer who lives apart from the spouse during the last six months of the year. Who furnishes over half the cost of maintaining a household during the year, and with whom the qualifying person [00:26:30] lives for more than half the year? So if you can check all three of those boxes under section 2184, then you've got one spouse that's filing separately. Could qualify for the child and dependent care expenses credit. In my experience, that credit is it's useful. We'll always take a credit if it's available. However, when we tend to deal with couples that are earning enough, [00:27:00] uh, either by way of their W-2 wages or they're self-employed and they're making enough to where dependent care expenses are a substantial amount of their their expenditures. Unfortunately, they tend to also reach income levels that significantly diminish the value of that credit.
Jeremy Wells: We see, in other words, we see a lot of $600 child dependent [00:27:30] care expenses credits, uh, when they're included in the returns that we prepare. If that couple filed separately, if one of them qualified under that section 21 E for exception, it would be it would be pretty exceptional to see, uh, that $600 being if that if that were the actual amount of the credit, which it probably [00:28:00] would with a lot of the returns that we see. Um, it would be interesting to see how that played out. But in general, uh, for married filing separately, unless you have one of those exceptions, you're just not going to see a benefit, um, or you're not going to see any of that credit, uh, as showing up on that return. Now, along with that, what we also tend to see with some of the wage earners, um, not so much with the self-employed folks. Is that [00:28:30] dependent care expenses as part of that employees compensation. And so this is where you see an amount on the W-2 in box ten. And that's the amount that's excludable under an employer's dependent care assistance program with a, uh, with a joint return, that amount can be up to $5,000. Also, uh, with Singleton Head of Household. However, with filing separately, that [00:29:00] excludable amount is limited to just $2,500. And we have seen returns where that was a benefit that they received.
Jeremy Wells: One of the W-2s has up to $5,000 in box ten, and unfortunately, there was a situation where we had to look at whether it made more sense to file jointly and capture the full 5000 or file separately, and have to limit that and cause some of that dependent [00:29:30] care assistance to become taxable income, then it's something to look out for. Um, and this decision of whether to file jointly or separately, again, this is one of those this is a good example of where the default, uh, is assumed to be filing jointly. And so something like this can happen where you have dependent care assistance program. Uh, and you've got the $5,000 [00:30:00] in box ten on the W-2. But then that's not the reality of the tax return that gets filed. So it's important to keep things like this in mind when we're preparing returns, as well as when we're advising clients. We would want to have a conversation with those clients, um, about that, uh, program. If we had one of these mismatches between what's being reported on W-2 and what we're actually able to claim and exempt on the return itself. One of [00:30:30] the best known, uh, disadvantages of filing separately, along with the uh, brackets being different, such that in general, we see a lower tax liability for joint returns than we do for separate returns, is that there are just a lot of credits that are no longer available, without exception, for those filing separately, the earned income credit, the EIC, or sometimes the EitC, [00:31:00] uh, the American opportunity credit, and then the lifetime learning credit.
Jeremy Wells: Those are disallowed on separate returns. The child tax credit and the retirement savings contributions credit It are reduced at income levels that are half those of the joint return. So again, like I said earlier, a lot of times when we have a dollar threshold for the calculation of some [00:31:30] benefit or some credit, those are cut in half for separate returns as opposed to joint or even single and head of household returns, child tax credit and the retirement savings contributions credit. Those are examples of where the income levels, where those credits phase out or are, uh, or hit a cliff. Those are actually cut in half for separate returns. [00:32:00] So it's something to keep in mind from a planning perspective. If you have a couple that is going to be eligible for those credits, but you're considering whether filing joint or separate returns is a conversation that should be had, uh, with the with the taxpayers, the elderly or disabled. Credit can't be claimed if the taxpayer lived with the spouse at any time during the tax year. So again, this is [00:32:30] one of those sort of interesting provisions in the tax code where the taxpayers are really pushed toward filing a joint return by the code. It's not really given equal weight between a joint return and then just splitting onto two separate returns here in this case.
Jeremy Wells: Uh, if they live together, they and they need those credits or those credits are important. Um, and losing them is not, uh, not [00:33:00] an okay position to take on that return. Then they're really pushed to filing jointly as opposed to separately in most cases. Um, and and I the it's beyond the scope of this episode to really get into these into the exceptions here. But in most cases, the exclusion or credit for adoption expenses is not allowed when filing separately. Again, uh, in order to get the benefit of that adoption credit, um, or to, uh, take [00:33:30] that on the return, the taxpayers really need to file a joint return, the deduction for student loan interest, which is actually, uh, an adjustment. That deduction is not allowed on separate returns. We'll talk later about, uh, the interaction between student loan repayment and filing status for married couples. But this is an interesting one. That and it's one that, uh, it's [00:34:00] important to keep in mind when we're looking at the decision of whether to file jointly or separately, especially in the context of taxpayers, uh, where one of them has significant student loans to repay. If they're in the process of repayment, then the student loan interest that normally might be deductible, uh, wouldn't be on separate returns. So again, we're in a situation [00:34:30] where the taxpayers are really pushed into considering filing a joint return together. If that student loan interest is a significant deduction that's available on their return.
Jeremy Wells: Contributions to Roth IRAs are phased out for a modified AGI of just $10,000 for separate returns. This, honestly, is one of the provisions that really just confuses [00:35:00] me. Um, and I'm not really sure, uh, what the intent here is. I'm sure there's probably some legislative background here that I haven't looked into yet, but, this is a planning point that we have to talk to clients every now and then about not not often, but every now and then we have a married couple that files separately and they want to contribute to their Roth IRAs. And we have to remind them that virtually I mean, it's not written [00:35:30] that they can't. It's just that the phase out is at $10,000 of AGI. And most married couples where both of them are working, are easily going to surpass an AGI of $10,000. Or if you have a situation where, uh, one of them isn't working, then to not have an AGI of at least $10,000 is basically going to mean that individual is not earning [00:36:00] any income. And in that situation, there wouldn't be any earned income to contribute to the Roth IRA. So it really hamstrings taxpayers. It's almost have AGI of right within that window of 7 to $10,000. Or that spouse filing separately just can't contribute to a Roth IRA at all. And I'm not really sure what the justification for that is, but it's one of those things that every now and then we've [00:36:30] got to tell a taxpayer the bad news that they can file separately, but they can't contribute to the Roth IRA, or they can file a joint return and contribute to the Roth IRA.
Jeremy Wells: But again, one of these situations where the tax code really pushes married couples to file jointly and not separately, the capital loss deduction is limited to $1,500 instead of $3,000 on a separate return. So again, like [00:37:00] a lot of other provisions in the tax code, the threshold is just simply cut in half. The taxpayer will have to include an income up to, uh, more, uh, Social Security, uh, or the railroad retirement benefits. Uh, but in general, Social Security. Well, the taxpayer will have to include more of that income, up to 85%, uh, in gross income. If the taxpayer lived with his or her spouse at any time during [00:37:30] the year and files a separate return. Again, another just kind of weird, uh, provision here in the tax code for married couples wanting to file separately after Tax Cuts and Jobs Act, the, uh, state and local tax or salt cap has been $10,000. And this has been a, uh, fairly hotly debated, uh, subject. That [00:38:00] cap is $5,000 on a separate return. Turn, which is interesting because a lot of times these caps are split in half to reflect an equality with a single return, for example. However, even on a single return, the cap, the salt cap is still $10,000.
Jeremy Wells: So it's interesting that for a married couple filing separately, that cap [00:38:30] is actually split in half down to $5,000. Again, another planning point to keep in mind with clients who are considering filing separate returns. And then finally, this is one of the rules that has to be kept in mind. And this is one that can really trip up preparers. When you have a married couple that's filing separately and the same firm or the same preparer is not preparing both spouse's returns, is that if a spouse [00:39:00] itemizes, then the other spouse cannot claim the standard deduction that other spouse must itemize as well. And if both taxpayers do claim the standard deduction, then the standard deduction is half the amount allowed on a joint return. But that first point that if two spouses file separately and one itemizes, then the other must itemize as well. That [00:39:30] can cause some issues. If you have a married couple and they're not preparing their returns together, uh, either they're having the same firm or professional prepare them or, uh, we've seen cases where the spouse is just aren't on speaking terms. They don't want to let the other spouse know, uh, anything about their tax return. We've even had situations where the other spouse just flat out will not say whether [00:40:00] they filed, uh, with the standard deduction or claiming itemized deductions, and it leaves us in a situation for the spouse's return that we're trying to prepare, where we're just not sure how to prepare it.
Jeremy Wells: In our firm, we have, uh, taken the position that if we just don't know, then we go with the approach that is most advantageous to the taxpayer. We're working with. Uh, but we issue a strong caveat [00:40:30] to that spouse, that, look, if if the other spouse filed first and did the other option of whatever we're doing on this return, then we we just really, uh, may not know what to do here. And so you might get an IRS notice, um, you might be in a situation where we're going to have to either respond to a notice or amend the return in order to make it align [00:41:00] with, uh, the other spouse's return. I haven't been in that situation many times. Uh, one time I can specifically remember maybe a couple other times where it wasn't, um, you know, it wasn't anything malicious. It's just we really didn't know. And the spouse we were working with just really couldn't get a straight answer, um, or any answer from the other spouse. Those situations are, uh, unfortunate, but, uh, but they do happen. But it's important to remember that we [00:41:30] need to if we're if we're filing a separate return for a married person, we need to at least, uh, ask and explain why we're asking of whether the other spouse took the standard deduction or itemized. Now, those are. That's probably not a comprehensive list. I probably left a couple of things out, but those are in general the main disadvantages of filing separately.
Jeremy Wells: And so it makes [00:42:00] sense why Most of the time when we're working with a married couple, we we want to file a joint return in order to get the best possible tax result for that couple. We don't want them missing out on credits that they could get by filing a joint return. We don't typically want them to miss out on deductions that they could get filing a joint return. And, uh, at the end of the day, the process of preparing and filing one joint [00:42:30] return, as opposed to two separate returns is honestly, it's just a little bit easier. However, uh, in our firm, we don't do what's easiest for us. We do what's best for, uh, the client, uh, within the bounds of the law and our best practices and ethics. So if we have a couple where even though it would be more work for us to consider filing joint returns, we will do that. Uh, for them, different firms are going to have different policies on [00:43:00] this, and it's up to your firm to do that. I've worked with firms where they considered filing separate returns as two different returns, and so they wanted separate engagements, and they quoted two different prices to each spouse. Um, or it might have been the same price, but they quoted a price to each spouse, um, and got paid as if they were two completely separate returns.
Jeremy Wells: I've worked with firms where they consider the joint return, and then the two separate returns as three returns and and [00:43:30] charge for three returns. Uh, and again, this all gets back to your pricing strategy. It gets back to how you want to work with your clients. Fortunately, a lot of, uh, professional grade tax software makes splitting the return a splitting a joint return into two separate returns. It it simplifies that a little bit. Again, just like with that joint versus separate summary or worksheet, it's not 100% perfect. You still have to make some adjustments. [00:44:00] You still have to review both returns as if they are two completely separate returns. However, that splitting tool within some of these tax softwares can cut out a lot of the busy work of going from a joint return and then having to create two separate returns and then reprepare those two returns. That can be a bit annoying, and I've worked with tax software where that was the only option. That was how you split a joint return into the two separate returns. [00:44:30] Now we're using a software that has added the functionality to make that happen. Uh, we have done that a couple of times. Again, it's it's not perfect. You still have to go in and make some adjustments, but, uh, it it does simplify and speed up the process of creating those two separate returns a little bit. So why would you want to file separately given all of the disadvantages that we just talked about of filing separately.
Jeremy Wells: In general, there [00:45:00] can be within even a married couple a situation of disagreement, mistrust, or even financial abuse. And this is one of the most common reasons for why a married couple that is not getting along, or is in the process, or on the verge of divorce might consider filing separately. So they're still married as of the end of the year. They still have to file as married, but they aren't [00:45:30] in a situation where they want to collaborate on a joint return. They don't want to put their tax documents and their financial information together into a joint portal account, for example. And so they want to prepare their returns separately. They might even want to have different preparers and different firms prepare their returns. On the flip side for the firm itself. Working [00:46:00] with a married couple that is on the rocks that is going through a divorce. Uh, it might cause a conflict of interest, especially if the firm started working with one spouse before the couple got married. There might be a preference or a bias, or even just the perception of a preference or bias toward one of the spouses over the other one. Again, I've worked with firms where the [00:46:30] position was if a couple is getting ready to divorce, then either we need some sort of waiver that is signed by both spouses. Uh, in saying that essentially there is no conflict of interest or that they're waiving any claim of a conflict of interest, but the firm needs to really be careful, um, especially in the middle of a divorce, and any divorce has the potential for being a messy divorce and therefore pulling the firm into that messy [00:47:00] divorce.
Jeremy Wells: We want to avoid that kind of situation, if at all possible. So anytime there's a situation like that where there's disagreement or mistrust or some sort of financial abuse going on, we want to be very careful as to what the firm's role and where the firm is inside of that conflict actually is. Generally, both taxpayers filing a joint return are jointly and severally liable for the tax liability. That is the [00:47:30] phrase that you'll often hear quoted. It comes out of IRC 6013 D three when a married couple, uh, files a joint return together, both spouses are jointly and severally liable for the tax liability. What that means is that it's not 5050. It's not that one spouse is responsible for half the tax liability, and the other spouse is responsible for the other half. It's [00:48:00] not even allocated. It's not that one spouse is responsible for her share of the liability based on her income. Either spouse can be held liable for 100% of the tax liability by the IRS at any point. This remains true even after divorce. In fact, if a couple divides or assigns that tax liability in a divorce document, the IRS and the courts have backed [00:48:30] the backed up the IRS on this.
Jeremy Wells: The IRS does not have to respect that document because it was never a party to that agreement. So even if a couple divorces after filing a joint return and they agree in that divorce document to split that liability a certain way, the IRS is still capable of going after each spouse individually for the full amount of that liability. So again, it's very important to [00:49:00] be careful with married couples that are in the process of going through a divorce or even really have recently divorced as some of these issues, especially if there was an unpaid tax liability on those joint returns. Some of these issues can crop up uh, again. Uh, student loan defaults can cause so-called Treasury offsets. This is essentially a garnishment of tax refunds by [00:49:30] the student loan. Uh, by the student student loan lenders. Uh, those garnishments of tax refunds can be applied to the debt. However, usually those refunds are nowhere near the total amount of the debt. And so the entire refund, uh, is usually garnished. Now, if the non-defaulting spouse can claim a refund, then filing separately could protect that spouse's refund. So you might have one spouse that [00:50:00] has a significant unpaid, uh, defaulted student loan debt. The other spouse is due a refund filing jointly could make that refund subject to one of these offsets. You might want to try to avoid that with a separate return.
Jeremy Wells: Now, that might lead to a situation where the couple pays more tax, or maybe the refund is reduced even for the spouse that is due that refund. However, getting some of that refund [00:50:30] with a separate return could be a better result than having the entire refund garnished by the student loan lender. There are also some AGI limited provisions for deductions. Uh. One of the better known ones is the 7.5% of AGI limit for deducting medical expenses. Casualty losses can also be limited to 10% of AGI. Now under [00:51:00] Tax Cuts and Jobs Act. We don't have miscellaneous itemized deductions. Uh and so that 2% of AGI limit uh isn't hasn't been relevant. However that might come back starting in 2026. So when we have situations like this where we've got a deduction that is limited by AGI, it might create a situation where one spouse, uh, based on her income, could have a significantly lower AGI, which [00:51:30] would significantly reduce that AGI floor and make more of that deduction, uh, able to be claimed on a separate return as opposed to a joint return. And then finally, what in our firm is by and large and has been for years now. The most common reason for a married couple to file separately is student loan income based repayment plans. A lot of those income based repayment [00:52:00] plans are based on a tax return based on AGI or taxable income. And so if you have a couple filing jointly where one of them owes a significant amount of student loans and the other spouse has a significant amount of income, then that can distort right from that couple's perspective, that income based repayment plan calculation.
Jeremy Wells: So what [00:52:30] those income based repayment plans do is effectively say that based on your income on last year's tax return, you're going to be required to have a minimum payment of a certain amount per month for the following year. The higher your income, The higher that income based repayment plan monthly minimum payment would be. So if you can show lower income, often by filing a separate return, then only the borrower has the only [00:53:00] the borrower separate return. The income from that return is used in that income based repayment plan. Nine out of ten times when we're filing married, filing separate returns in our firm, it's because of student loan income based repayment plans. That's one of the most common reasons that we see separate returns. Some of the common myths and misunderstandings I want to cover here of filing separately married couples choosing to file separately. Tax filing status is [00:53:30] never a reflection of the couple's marriage or relationship. Nothing is being indicated to anyone, whether it's the IRS or a state revenue agency, or a creditor or third party that's going to use tax returns. Filing status should never be considered any sort of measure or indication of the actual status of that couple's marriage or relationship.
Jeremy Wells: This is something that normally don't have to talk to other tax professionals about, but [00:54:00] we often have to explain this to taxpayers. Um, there's nothing wrong about filing separate returns. Uh, nobody is going to look at separate returns and think that's an indication of something wrong with your marriage or your relationship. So from the tax professionals perspective, it's also it's often something that we have to make very clear. And we have to explain to taxpayers that that's important. So be sure to have that explanation ready to [00:54:30] go whenever you're, uh, consulting with a married couple and you want to advise them or maybe recommend filing separate returns, be ready for that little bit of pushback. We don't. I've heard that before. Uh, from married couples. We don't want to file separate returns, because we don't want it to look like something's wrong with our marriage. Maybe they won't. Maybe some some bank won't give us a loan because they think something's wrong with our relationship. That's not going to happen. Um, that's not how it works. Another, uh, myth [00:55:00] is that using filing status as a tool, uh, to achieve some financial goal is is wrong somehow. This especially comes up with the student loan, uh, income based repayment plan issue. Uh, I've seen tax pros question whether that's a legitimate, uh, use of filing status. It absolutely is. Again, it's up to the married couple whether they want to file separate returns or whether they want to jointly elect to file a joint return filing separately. [00:55:30]
Jeremy Wells: Again, it's not a red flag. It's not an audit risk. As long as the taxpayer still take reasonable positions and can substantiate those positions on their individual separate returns. There's there's no red flag. There's no extra audit risk here of married couple filing separate returns as opposed to a joint return. Generally, that decision to file jointly is irrevocable. Uh, once we're past the filing date or the extended filing date, the decision to file separately [00:56:00] is not generally now. In other words, the way you'll hear this said is a couple can make up, but they can't break up. That's the way I like to remember it. That's why I like to explain it to clients. And it's true most of the time. However, there are some exceptions, so a couple can file a superseding return on or before the unextended due date, um, of that uh return in order to go from uh, uh, married filing jointly to married filing [00:56:30] separately. They can also have the marriage annulled. Now, if a couple gets the marriage annulled, then revenue ruling 76 255 Allows a taxpayer, following that annulment to amend any joint returns that are open under the statutes of limitations. So that's an option that might be available. If a marriage is annulled. It might be something to review with the taxpayers. Now, if the if [00:57:00] one of the spouses can show that a joint return was signed under duress, and this is starting to get into some of the issues with innocent spouse relief and injured spouse relief, and that's not really it's beyond the scope of this episode.
Jeremy Wells: However, I might plan a future episode on those topics. Um, but if a, uh, if a spouse can demonstrate to the court that a joint return was signed under duress, uh, then that [00:57:30] could that, uh, essentially invalidates, uh, that joint return under Treasury Regulation 1.6 13 For D, the Tax Court has held that, uh, a spouse disavowing the signing of a joint return has to show that she was unable to resist demands to sign the return and that she would not have signed the return except for that, uh, constraint, uh, applied, [00:58:00] uh, to her will. Uh, and so that's that's the tax court precedent. It's a relatively high bar. Uh, a spouse can't just come back a couple years later and say, I didn't want to sign that return. There is a burden of proof on that spouse in order to demonstrate that to the court. And, uh, the the fourth exception, uh, to being able to amend a joint return, uh, is if the spouse can show the joint return was not signed by both taxpayers. Now, there's a [00:58:30] Treasury regulation 1.6 13 1A2 provides that a joint return must generally be signed by both spouses, unless the return is being made by an agent of one or both spouses. And that tax court precedent holds that a spouse can sign by tacit consent.
Jeremy Wells: This can often get into trouble when you've got spouses that have filed jointly for years and have recently split up or divorced, and one of the spouses comes back and says, I [00:59:00] just. I never consented to filing all of those joint returns. It can be difficult to counter that tacit consent precedent, uh, in court. Now, one way to get around that might be timely filing a separate return, uh, as quickly as possible, um, might help counteract that claim of tacit consent. But in general, again, it's a relatively high level of burden of proof for, uh, that spouse. I want to thank Tom Gorzinski for putting together [00:59:30] a great article on these exceptions to that, that old adage that the couple can, uh, can make up but can't break up. It is possible, under these four limited circumstances, to be able to amend a joint return to separate returns. I want to close with this point. I mentioned this briefly earlier, but our job as tax professionals is not always to prepare the simplest, most tax efficient return possible. A lot of times it is, [01:00:00] but sometimes our job is to advise the taxpayer on the options with the trade offs and help them achieve the best overall result for their personal and financial needs within the constraints of the law and our professional best judgment. Sometimes that means filing separate returns, paying a little bit extra tax, but getting a better overall result for the taxpayer.
