By Laura Saunders
The rarely used "married, filing separately" tax status is a
boon for the few Americans who choose it each year. More will
likely join that club for tax year 2018.
The reason: The tax overhaul's new 20% deduction for
pass-through businesses should lower tax bills for some couples if
they opt to file separately. The provision took effect in
January.
Overall, most married couples will still file joint returns.
In 2015, according to the most recent data from the Internal
Revenue Service, only about 3 million out of 150 million returns
were "married, filing separately." An important reason for this
dearth of filers is that this status doesn't allow spouses to file
as though each is single. Instead, it often limits the tax breaks
that joint-filing couples can take.
Here's a current example.
When Congress overhauled the tax code last year, lawmakers
capped deductions for state and local taxes, or SALT, at $10,000
per return for 2018 and after. Thus married couples get half the
SALT write-off per person that singles do.
But spouses can't get two $10,000 deductions by filing
separately. If they do, the law allows only $5,000 of SALT
deductions to each spouse. To qualify for two $10,000 write-offs,
the couple would have to divorce.
This result might seem unfair, but such outcomes are common for
married couples filing separately. Most can't claim the American
Opportunity education credit or certain other breaks, and the
ability to deduct a traditional IRA contribution or to make a Roth
IRA contribution often phases out at $10,000 of income. For a list
of limits, see IRS Publication 501.
Why did Congress enact rules that push couples to file
jointly?
According to tax policy specialist Dennis Ventry of the
University of California, Davis, the tax code for decades favored
families in which one spouse earned most of the income, giving them
a "marriage bonus." That was unfavorable to single filers, and
subsequent efforts to help them created burdens for two-earner
married couples.
This tilt has persisted in many provisions, says Mr. Ventry.
Meanwhile, "married, filing separately" provides benefits for
some couples filing for 2017. The tax overhaul will likely enhance
it going forward.
Experts stress the necessity of doing the math in each case, but
here's when this option could be a smart choice.
--To reap a 20% pass-through deduction. Tax overhaul now
provides a 20% write-off to owners of pass-through businesses such
as S-corporations and sole proprietorships. But important limits
kick in above $157,500 of taxable income for single filers and
$315,000 for married couples.
Say that one spouse earns $150,000 as a pass-through owner and
the other earns $300,000 of wages, putting the couple above the
$315,000 limit. By filing separately, this couple might get the
break for the business owner.
Under the law, the 20% deduction applies to spouses filing
separately up to $157,500. This strategy could save some couples
several thousand dollars a year, according to analyst Scott
Greenberg of the Tax Foundation.
Janet Hagy, a certified public accountant in Austin, Texas, says
clients are already asking about this move. "It's a huge new
incentive for couples to file separately."
--To sever liability. Signing a joint return makes each spouse
liable for the other's tax misdeeds, which can be disastrous.
Filing separately ends liability for the other spouse's taxes.
But it may raise the couple's overall tax bill. To help with
this issue, Douglas Stives, a CPA who teaches at Monmouth
University in New Jersey, says he has counseled divorcing couples
to file separately while still married.
Then they include a provision in the decree agreeing to file
amended joint returns and claim a refund for prior years after the
divorce is final. Taxpayers typically have three years to amend
such returns.
--To reduce a threshold. If one spouse has deductions that are
only allowable above a certain threshold, sometimes filing
separately will lower the couple's taxes.
For example, the threshold for deducting medical expenses for
2017 and 2018 is 7.5% of income. If one spouse has high medical
expenses, filing separately might increase the deduction.
A 2% threshold applies for miscellaneous itemized deductions on
Schedule A, but these write-offs are repealed after 2017.
--To lower state taxes. Some states have lower levies if spouses
file separately. Jeffrey Porter, a CPA in Huntington, W.Va., says
his married clients in nearby Ohio who file separately often save
more from lower state taxes than they lose to higher federal
taxes.
--Caveats. This status has many quirky rules, such as that if
one spouse itemizes deductions, the other has to as well. Filing
separately in community-property states like Texas or California
can also require special effort.
In addition, tax specialists say there are often processing
glitches at the IRS if one spouse pays estimated taxes for both but
they file separately. Untangling them takes time and raises
fees.
Write to Laura Saunders at laura.saunders@wsj.com
(END) Dow Jones Newswires
February 23, 2018 05:44 ET (10:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.