Adventures in Taxland: Filing Status

This tax season, I have had a number of clients who are married couples inquire about filing separate returns. Sometimes they say they know another couple who did that and got a better refund. I always give these clients the same advice.

As a married couple, you have two options for filing: Married Filing Jointly (MFJ), and Married Filing Singly (MFS). Under the joint status, you pool both incomes, combine your two personal exemptions with those of any dependents you have, and either itemize deductions or take the standard deduction of $11,600

Using the MFS status, each spouse files a separate return, with their incomes separate, and one personal exemption. The spouses can divvy up the dependents however they want. The standard deduction for each spouse is $5800, exactly half of what it is for MFJ. The tax tables for MFS are exactly half of what they are for MFJ. Unless you have an unusual situation with deductions, there are no tax benefits to MFS.

There are disadvantages to MFS. You lose access to the Earned Income Credit, the Dependent Care Credit, the Lifetime Learning Credit, and you double your tax preparation costs. If there are no tax benefits, and potentially significant disadvantages, you shouldn’t do it. I always counsel my clients to bite the bullet and file jointly.

Of course, what the client are really asking is whether they should split their filing status into Single and Head of Household.

Let’s say that the husband earns $30,000, and the wife earns $15,000, with her claiming their one child. As a Single filer, he gets a standard deduction of $5800, the same as he gets for MFS. But if she claims to be unmarried, as the Head of Household, she gets a standard deduction of $8500. So they have already reduced their tax burden.

But wait, there’s more! As a married couple with combined income of $45,000 and one child, your earned income credit (EIC) is $0. But as Head of Household with one child and $15,000, the EIC is $3094. Add $3094 to your refund and, ding-ding-ding, you’ve got a lot more money for changing your status. And all you have to do is lie on your tax return.

The technical term for that, of course, is tax fraud. If I knowingly put down the wrong status for a married client, I have committed a crime. So I play dumb and only offer the clients the legal options, although I know what they want to here.

Besides, if I have to pay my share of taxes, why shouldn’t they?