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The general rule for married folks filing their tax returns is that they can ONLY use file as Married Filing Jointly (MFJ) or Married Filing Separately (MFS). Most married folks will typically choose to file Married Filing Jointly (MFJ). Obviously, they choose this filing status because of the favorable tax treatment the IRS allows married couples who choose to file together.
Married Filing Separately, on the other hand, is oftentimes the worst filing status anyone could choose, because tax is calculated at the highest rates possible, and the taxpayer also misses out on many tax credits and other tax advantages.
But in the real world, unfortunately, married folks do separate and go their own ways, and because they are not yet legally divorced, they will have no other choice but to use the unfavorable Married Filing Separately (MFS) filing status. With this filing status, there are some very distinct tax disadvantages, which will ultimately adversely affect one’s financial health.
The MFS filing status carries with it the following disadvantages:
- If your spouse claims itemized deductions, you are not allowed to claim your own standard deduction; meaning that you will have to itemize also. But the problem is; if the expenses that you are eligible to itemize are less than the amount of your standard deduction, you could lose out on a substantial tax deduction.
- You cannot claim the credit for child and dependent care expenses in most cases.
- You cannot claim the education credits, the deduction for student loan interest, or the tuition and fees deduction.
- You cannot claim the earned income credit, which depending on your income can be a very substantial tax credit.
- You cannot exclude from income any interest earned from Series EE U.S. Savings Bonds that was used for higher education expenses.
- You cannot claim the credit for adoption expenses in most cases, which also, can be very substantial.
- You may receive a smaller child tax credit than if you filed jointly.
- Your capital loss deduction is limited to $1,500 (instead of $3,000 for all other filing statuses).
Also, if you lived with your spouse at any time during the year and filed MFS, you:
- Cannot claim the credit for the elderly or the disabled.
- May have to include more Social Security benefits received in taxable income.
- Cannot roll over amounts from a traditional IRA to a Roth IRA.
All is not lost, however, because tax law allows a very important EXCEPTION to the general rule that married folks must file either MFJ or MFS. Many people might not be aware of this, but under tax law, if you are married and separated from your spouse, you may be “considered unmarried” if certain conditions are met. If you meet these conditions, this means that you would not have to use the unfavorable MFS filing status, but could qualify to use the more favorable Head Of Household filing status, and as such, would not be subject to the disadvantages listed above, which are associated with the MFS filing status.
Under tax law, you can be “considered unmarried” if you meet ALL the following tests:
- Obviously, you must intend to file a separate return from your spouse. You must have paid more than half the costs of keeping up a home for the tax year.
- You must not have lived with your spouse at any time during the last 6 months of the tax year.
- Your home must be the main home for your child, stepchild, or eligible foster child, for more than half of the year.
- You must be able to claim an exemption for the child living with you. (You still meet this test if you did not claim the child because you allowed the non-custodial parent to claim the exemption for the child for the year in question.)
Taking advantage of this tax break will ensure that you will be able to claim all the tax benefits you couldn’t claim using the MFS filing status, and you will be taxed at a lower rate, and hence, place yourself in a much better financial position.