Married federal employees have two choices with respect to how they can file their federal income tax returns: married filing jointly (MFJ) or married filing separately (MFS). Overall, most married couples file as jointly, but under The Tax Cuts and Jobs Act tax law (which became effective on Jan. 1, 2018) more couples will likely be filing separately on their 2018 tax returns to be filed in spring 2019. This column discusses what married couples should consider before deciding on their tax filing status when filing their 2017 tax returns.
According to the most recent statistics furnished by the Internal Revenue Service, during 2015 only three million out of 150 million federal tax returns filed were filed as MFS. Perhaps one reason for such relatively few MFS filers is that the MFS filing status does not allow each spouse to file as though each is single. On the contrary, the MFS filing status often limits the tax deductions that married couples filing MFJ can take.
Examples of Eliminations and Limitations of Tax Deductions for Married Filing Separately
The following are examples of the eliminations and limitations of tax deductions and tax credits for married couples filing as MFS:
• Deductible traditional IRA or Roth IRA contributions. For MFS filers, the ability to make a deductible traditional IRA contribution or make a Roth IRA contribution phases out when the filer’s adjusted gross income (AGI) exceeds $10,000.
• Lost tax credits. MFS filers will lose tax credits including the child and dependent care credit, the American Opportunity Tax Credit, and the adoption credit.
• Lost tax deductions. MFS filers will lose income deductions including the tuition and fees deduction (reinstated for 2017), the student loan interest deduction, and the U.S. savings bonds interest deduction.
• Taxable Social Security benefits. A greater percentage of either or both spouses’ Social Security benefits may be taxable when the couple files as MFS.
• Itemizing versus taking the standard deduction. When filing as MFS, if one spouse itemizes deductions, then the other spouse must also itemize. That is, the other spouse cannot claim the standard deduction – even if the other spouse has a lesser amount of itemized deductions compared to the standard deduction.
Medicare Part B Premiums
Another disadvantage for MFS filers is with respect to the amount paid for Medicare Part B premiums. Unlike Medicare Part A (hospital insurance) which is free for federal annuitants over age 65, Medicare Part B (medical insurance) is not free. There is a monthly premium for Part B, the amount of which depends on an individual’s modified adjusted gross income (MAGI). The table below summarizes the Medicare Part B premiums by filing category for 2018, based on an individual’s 2016 MAGI.
|If your MAGI* in 2016 was…….||
Then you pay each month
File individual (single or head of household) tax return
File married and joint tax return
|File married and separate tax return (MFS)|
|$85,000 or less||$170,000 or less||$85,000 or less||$134.00|
|above $85,000 up to $107,000||above $170,000 up to $214,000||Not applicable||$187.50|
|above $107,000 up to $133,500||above $214,000 up to $267,000||Not Applicable||$267.90|
|above $133,500 up to $160,000||above $267,000 up to $320,000||Not applicable||$348.30|
|above $160,000||above $320,000||above $85,000||$428.60|
*MAGI is one’s adjusted gross income (AGI) plus tax-free interest income and tax-exempt dividend income
Note that those individuals enrolled in Medicare Part B during 2018 and who filed as MFS on their 2016 federal tax returns and whose MAGI exceeds $85,000 are paying the highest monthly premiums for Part B during 2018.
When Your 2017 Tax Return Can Affect 2019 Medicare Premiums
For those married annuitants who will be at least 65 during 2019, one’s filing status on their 2017 tax returns is important because what they will pay in Part B monthly premiums during 2019 will be determined from their 2017 MAGI and filing status on their 2017 tax returns.
While it is generally more beneficial – that is, resulting in less overall tax liability for married couples to file as MFJ – there are circumstances in which a married couple filing as MFS makes sense. But it is important to stress the importance for a married couple to “run the numbers” by computing their overall federal and in most states the state tax liability for both the MFJ and MFS filings.
When Married Filing Separately May Be A Better Option
The following are some circumstances in which MFS may be a better filing option:
• No joint liability. By signing a joint return, each spouse is responsible for the other’s tax misdeeds. A spouse who files MFS is not responsible for reporting or paying tax on items attributable to the other spouse.
• To lower a deduction “threshold”. If one spouse has deductions that are allowable only above a certain threshold, then filing MFS could lower the couple’s overall tax liability. For example, the threshold for deducting medical expenses for 2017 and 2018 is 7.5 percent of one’s adjusted gross income (AGI). If one spouse has excessive medical, dental and/or vision expenses while the other spouse does not, then filing as MFS may increase the medical expense deduction.
• To lower state income taxes. In some states, a married couple filing as MFS will pay less in overall taxes by filing as MFS. But married individuals who live in one of the 10 community property states – the list includes Alaska, Louisiana, Texas, New Mexico, Arizona, California, Washington, Idaho and Wisconsin – should be aware that itemizing on one’s taxes while filing as MFS requires extra time and effort. This could result in additional fees for individuals who have their taxes professionally prepared.
Another potential problem for married couples who file as MFS occurs when only one spouse pays quarterly estimated taxes to the IRS and/or to a state revenue department but the payments are in reality for both spouses. Untangling the payments to determine which part of the payment applies to either spouse takes time and can result in adding to the cost of preparing each spouse’s tax return.