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When Does Married Filing Separately Make Sense?
Posted By Jim On 03/26/2008 @ 7:20 am In Taxes | 312 Comments
After the wedding, I started taking a closer look at the tax numbers and incorrectly concluded that the only time someone would ever file as “married filing separately” would be if one partner earned a whole lot and one partner earned not as much. The logic was that the lower earner wouldn’t be subject to the same tax rates as the higher earner and thus the difference would overcome the different tax brackets. The only correct assumption I made was that the lower earner wouldn’t lose access to any tax advantaged accounts, like Roth IRAs, because they’d still be over the limits for those types of accounts. I already gave out my hypothesis and my result (I was wrong and am now clueless as to why anyone would file separately if both options were available) but here’s what I did.
Hypothesis: Married Filing Separately shares more of the lower tax brackets as Single filers but you lose practically all of the favorable tax benefits that Single filers enjoy. The benefit of filing separately is if you have a significant disparity in income with the sum total above many of the tax beneficial limits. (this hypothesis is proven wrong)
The analysis was using 2008 brackets but you can see the current tax brackets  here.
|Tax Rate||Single||Married Filing Jointly||Married Filing Separately|
|10%||Not over $8,025||Not over $16,050||Not over $8,025|
|15%||$8,025 – $32,550||$16,050 – $65,100||$8,025 – $32,550|
|25%||$32,550 – $78,850||$65,100 – $131,450||$32,550 – $65,725|
|28%||$78,850 – $164,550||$131,450 – $200,300||$65,725 – $100,150|
|33%||$164,550 – $357,700||$200,300 – $357,700||$100,150 – $178,850|
|35%||Over $357,700||Over $357,700||Over $178,850|
What happens with a couple earning $100,000 with one earner taking in $80,000 and one earner taking in $20,000?
That’s a difference of $2,802.50 but both individuals lose access to a Roth IRA (among other significant benefits).
What about a couple earning $200,000 with one earner banking $120,000 and one banking $80,000 would pay (this doesn’t take into account deductions):
What!? It’s more to file separately… maybe the disparity has to be greater. What if a couple earned $400,000 with one earner banking $320,000 and one banking $80,000?
So, I tried to do more research and discovered this great About.com article  and according to William Perez, filing separately makes sense in two basic scenarios:
Let’s ignore scenario #2 because anyone who lets someone else knowingly cheat on taxes doesn’t really need to worry about their tax bill, they have bigger issues. With scenario 1, you have to be in such a small window, for both earners, such that the lower earner’s deductions will save them more than the higher earner loses by filing separately (as evidenced by our 80/20 example above). The 25% tax bracket starts at $32,550 for married filing separately but starts at $65,100 for married filing together! I suppose the numbers have to be in that range for this to make sense… but then you start giving up great benefits such as a Roth IRA, which is available if your total AGI is less than $156,000 when you file jointly but only $10,000 when you file separately! (plus, I don’t know if I’d classify someone earning $80,000 as someone who would owe a “significant amount of money,” hence my 120/80 and 320/80 examples)
Plus, if you read the article some more, there are so many headaches involved in filing separately (both have to take itemized or both take standard, state taxes are a pain in many states, etc.) that I can’t even imagine the strangely specific scenario in which filing separately truly makes both financial and psychological sense.
Why would you file separately if you could file jointly?
Hat tip to Ryan Waggoner  for providing this Quicken post with some solid reasons for married filing jointly , the main financial reason happens to be in the blind spot of my analysis, itemized deductions.
(Photo: Sean Molin Photography )
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 current tax brackets: http://www.bargaineering.com/articles/federal-income-irs-tax-brackets.html
 great About.com article: http://taxes.about.com/b/2006/02/05/married-filing-separately-tax-question-of-the-day.htm
 Ryan Waggoner: http://www.ryanwaggoner.com/
 reasons for married filing jointly: http://www.quicken.com/cms/viewers/article/taxes/28392
 Sean Molin Photography: http://www.flickr.com/photos/seanmolin/5928977629/sizes/s/in/photostream/
Thank you for reading!