Married individuals can either file a joint income tax return or, if they choose, may file two separate tax returns. Filing separate tax returns is usually (but not always, as you will see) done to reduce the tax liability. However, if finding the lowest tax liability is your main concern, there are no actual guidelines for determining which filing method you should use. If this is your goal, you need to calculate the tax liability under both scenarios to see which is better. Nonetheless, there are other factors you need to consider.

Note: Although only married taxpayers may file jointly, if the individuals are separated and living apart, they may still file a joint return. However, if a husband and wife are legally separated, they are not considered to be married, and a joint return may not be filed.

Disadvantages of Filing Jointly

At first glance, you would think that married individuals would always want to file a joint return. After all, a joint return is certainly simpler to prepare and the applicable tax rates are the lowest for married filing jointly. However, due to various individual situations, the lowest tax liability may actually result from filing separately. In addition, there may be at least two other disadvantages to filing a joint return:

• A joint return precludes a deduction for alimony. Prior to a divorce, a spouse who pays taxable alimony, must file a separate return in order to be able to deduct the payments.
  
  Although alimony is deductible by one spouse and is taxable to the other spouse, it may not be a wash if separate tax returns are filed. Assume, for example, that the payor spouse is in the 28 percent tax bracket while the payee-spouse is in the 15 percent bracket. Each dollar of alimony will yield post-tax income of 85 cents to the payee while the payor is entitled to a post-tax deduction of 72 cents, making for a 13-cent difference on every dollar of alimony.
• A joint return means the couple is jointly and severally liable. Generally, individuals who file a joint tax return are jointly and severally liable for any income tax, penalties and interest from the return. (The exception to this is if the innocent-spouse rules apply.) The IRS may collect such amounts from either spouse. Therefore, if the individuals are divorcing and even if married filing separately results in a higher-net-tax liability, it may be worth filing separately in order to protect one or the other party.

Itemizing on Separate Returns

If a couple files separately and one spouse itemizes deductions, the other spouse should also itemize as otherwise their standard deduction is zero.

As to which spouse can claim which deduction, the answer depends mostly on whether one lives in a community property state. If qualifying expenses are paid by a spouse with separate funds, then that is the spouse who may claim the deduction for paying them. However, if the expenses were paid with community funds and the couple lives in a community property state, then usually each spouse claims half of the deduction.

Filing Separately Prevents Certain Deductions and Credits

If a married couple decides to file as married filing separately, there are certain deductions and credits that may not be claimed. Taxpayers who are married filing separately can not claim the:

• Hope Credit or the Lifetime Learning Credit,
• IRS Section 32 earned income credit,
• IRS Section 22 credit for the elderly and disabled, unless the spouses lived apart all year,
• IRS Section 21 credit for household and dependent care expenses,
• IRS Section 23 adoption assistance credit,
• IRS Section 135 exclusion for any amount realized from redeeming qualified U.S. savings bonds that are used for higher education expenses, or
• Deduction for any IRS Section 221 interest paid on a qualified student loan.

In addition to the above, married taxpayers who file separately:

• May have a smaller IRS Section 24 child tax credit, and
• May have to include in income more of any Social Security benefits (including any equivalent railroad retirement benefits).

Change of Filing Status

If married individuals file a joint return, they may not later amend their return to file married, filing separately for that taxable year. However, the reverse is not true. Generally, if either or both spouses file a separate return, a joint return can still be filed as long as:

• No more than three years have elapsed from the due date of the return, without regard to extensions,
• No notice of deficiency has been mailed to either spouse for the year. (Note that if the individual has not filed a return by the time the IRS mails a notice of deficiency, the IRS can determine the spouses’ filing status as either married filing separately or as jointly. The IRS is not obligated to use the most favorable method.)
• Neither spouse has sued in any court for the recovery of any part of the tax for the year, or
• Neither spouse has entered into a closing agreement (see Section 7121) with respect to the tax year nor has there been a compromise of any case arising against either spouse for the tax year.

Miscellaneous, But Important

There are additional issues to be considered when determining the correct filing status for certain taxpayers:

• Generally, if either spouse is a nonresident alien during a tax year, a joint tax return can not be filed. An exception to this occurs when a nonresident alien is married to a U.S. citizen or resident and, if both spouses elect, a joint return may be filed.
• If the spouses have different tax years, a joint return is not allowed.
• If an individual is considered to be missing due to service in a combat zone, the spouse may elect to file a joint return.
• If the taxpayers are only married for part of a tax year, they may not prorate their income and use different rates for each part of the year.

In Summary: What Should You Do?

Usually married couples will have the lowest tax liability if they file a joint income tax return rather than separate returns. However, this is not always the case, and you must prepare the tax return both ways to be absolutely sure this is so. Plus, there are specific situations where it may be better to file separately due to other reasons.

To answer the question of what you as the tax preparer should do, there are two things. First, you need to understand the client’s situation. Make sure that the liability for any income tax, penalties and interest resulting from the return won’t be an issue. Furthermore, determine whether alimony is being paid and be sure to look at what credits the taxpayer may be entitled to claim.

Finally, you can (and, really you must) use income tax planning software that will allow you to prepare the tax return both as married, filing jointly and married, filing separately. Only then can you make the absolute best decision for your client.

Nancy Faussett, CPA, has over 25 years of tax accounting experience. With BNA Software since October 2001, Nancy serves as in-house expert on fixed assets, depreciation, and various areas of corporate and individual income taxation. Author of the Best Depreciation Guide for Best Software (now Sage), Nancy has also been published in Strategic Finance and the ACT Journal. Previously she was vice president of tax preparation for General Business Services and later worked as a depreciation and tax specialist for Best Software.