Does filing taxes "Married Filing Separately" make sense in our situation?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
katnok
Posts: 217
Joined: Fri Nov 11, 2011 7:36 pm

Does filing taxes "Married Filing Separately" make sense in our situation?

Post by katnok »

Dear bogleheads, I would greatly appreciate your input on our situation.

We have always filed our taxes "MFJ" but wondering if our situation this year would benefit from "MFS" (Married Filing Separately).

Our combined income is approx 250k (I make about 200k and spouse makes ~50k) with a marginal tax bracket for MFJ of 24%. If we file jointly for 2021, we expect to take standard deduction, so it's kind of straight forward. However, this year, we bought and sold an individual stock in our joint brokerage account, which generated about ~20k in short-term capital gains.

If we choose to file separately, can the lower earning spouse include the entire capital gains on his/her tax return (assuming it means reduces total tax burden) or does it need to be split 50/50 because the money was invested in our joint account? Or is there a different way?
TIA
User avatar
rob
Posts: 5236
Joined: Mon Feb 19, 2007 5:49 pm
Location: Here

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by rob »

You cannot arbitrarily alloc capital gains like your hoping....
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
User avatar
quantAndHold
Posts: 10141
Joined: Thu Sep 17, 2015 10:39 pm
Location: West Coast

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by quantAndHold »

MFS is almost always worse than MFJ, tax brackets and deduction phaseouts are generally unfavorable. But it’s easy enough to try both out in your tax software of choice and see which works better.

I don’t know the answer to your specific question, but I suspect you’ll need to split the sale. Even if you can put it entirely on your wife’s return, with your high income, I suspect you’ll still come out better with MFJ.

Are you in a community property state, by chance? In community property states and MFS, you have to use the income splitting method, which basically means you add up both of your incomes, divide by 2, and each report that amount.
Topic Author
katnok
Posts: 217
Joined: Fri Nov 11, 2011 7:36 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by katnok »

rob wrote: Sat Dec 04, 2021 3:05 pm You cannot arbitrarily alloc capital gains like your hoping....
I'm not hoping, but just trying to understand how this works.
Topic Author
katnok
Posts: 217
Joined: Fri Nov 11, 2011 7:36 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by katnok »

quantAndHold wrote: Sat Dec 04, 2021 3:06 pm MFS is almost always worse than MFJ, tax brackets and deduction phaseouts are generally unfavorable. But it’s easy enough to try both out in your tax software of choice and see which works better.

I don’t know the answer to your specific question, but I suspect you’ll need to split the sale. Even if you can put it entirely on your wife’s return, with your high income, I suspect you’ll still come out better with MFJ.

Are you in a community property state, by chance? In community property states and MFS, you have to use the income splitting method, which basically means you add up both of your incomes, divide by 2, and each report that amount.
Yes, we live in a community property state.
stan1
Posts: 14235
Joined: Mon Oct 08, 2007 4:35 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by stan1 »

I'd recommend using your tax software to do some what-if analysis.
GTBuzz
Posts: 205
Joined: Wed Apr 01, 2015 2:06 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by GTBuzz »

Do you have any children/dependents? If so, that may favor filing separately if the lower earning spouse can claim the children which might make them eligible for expanded child tax credits and $1400 recovery payments that would otherwise be phased out due to income if filing jointly.
jebmke
Posts: 25271
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by jebmke »

quantAndHold wrote: Sat Dec 04, 2021 3:06 pm MFS is almost always worse than MFJ, tax brackets and deduction phaseouts are generally unfavorable. But it’s easy enough to try both out in your tax software of choice and see which works better.
Correct. I've done hundreds of returns over the last 10+ years and I can only recall three cases where it worked to the taxpayers' advantage to file MFS. The only practical way to find out is to do it both ways.

I had one case where each spouse lived in different states and worked in the opposite state - it was crazy. I think I ended up doing 12 returns to find the optimal solution (DE was one state and you can file separate in DE even if you file joint in MD.).
Stay hydrated; don't sweat the small stuff
Topic Author
katnok
Posts: 217
Joined: Fri Nov 11, 2011 7:36 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by katnok »

GTBuzz wrote: Sat Dec 04, 2021 3:21 pm Do you have any children/dependents? If so, that may favor filing separately if the lower earning spouse can claim the children which might make them eligible for expanded child tax credits and $1400 recovery payments that would otherwise be phased out due to income if filing jointly.
Have 2 young kids.
User avatar
retiredjg
Posts: 53989
Joined: Thu Jan 10, 2008 11:56 am

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by retiredjg »

Many things are lost when filing separately. Roth IRA contributions come to mind as well as a number of tax credits. Perhaps if you do an internet search, you could find a list of the things that might be lost.
User avatar
HueyLD
Posts: 9782
Joined: Mon Jan 14, 2008 9:30 am

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by HueyLD »

katnok wrote: Sat Dec 04, 2021 3:13 pm
quantAndHold wrote: Sat Dec 04, 2021 3:06 pm MFS is almost always worse than MFJ, tax brackets and deduction phaseouts are generally unfavorable. But it’s easy enough to try both out in your tax software of choice and see which works better.

I don’t know the answer to your specific question, but I suspect you’ll need to split the sale. Even if you can put it entirely on your wife’s return, with your high income, I suspect you’ll still come out better with MFJ.

Are you in a community property state, by chance? In community property states and MFS, you have to use the income splitting method, which basically means you add up both of your incomes, divide by 2, and each report that amount.
Yes, we live in a community property state.
Since you live in a community property state, MFS requires a lot of extra work for very little extra benefits.

I suggest that you read IRS Pub 555 to get some understanding of what may be involved.

https://www.irs.gov/pub/irs-pdf/p555.pdf
Topic Author
katnok
Posts: 217
Joined: Fri Nov 11, 2011 7:36 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by katnok »

HueyLD wrote: Sat Dec 04, 2021 3:43 pm
katnok wrote: Sat Dec 04, 2021 3:13 pm
quantAndHold wrote: Sat Dec 04, 2021 3:06 pm MFS is almost always worse than MFJ, tax brackets and deduction phaseouts are generally unfavorable. But it’s easy enough to try both out in your tax software of choice and see which works better.

I don’t know the answer to your specific question, but I suspect you’ll need to split the sale. Even if you can put it entirely on your wife’s return, with your high income, I suspect you’ll still come out better with MFJ.

Are you in a community property state, by chance? In community property states and MFS, you have to use the income splitting method, which basically means you add up both of your incomes, divide by 2, and each report that amount.
Yes, we live in a community property state.
Since you live in a community property state, MFS requires a lot of extra work for very little extra benefits.

I suggest that you read IRS Pub 555 to get some understanding of what may be involved.

https://www.irs.gov/pub/irs-pdf/p555.pdf
Will do. Thank you
AnEngineer
Posts: 2407
Joined: Sat Jun 27, 2020 4:05 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by AnEngineer »

katnok wrote: Sat Dec 04, 2021 3:22 pm
GTBuzz wrote: Sat Dec 04, 2021 3:21 pm Do you have any children/dependents? If so, that may favor filing separately if the lower earning spouse can claim the children which might make them eligible for expanded child tax credits and $1400 recovery payments that would otherwise be phased out due to income if filing jointly.
Have 2 young kids.
Because of the aggressive phase out of the last EIP, it's possible that MFS is better, putting the kids on the lower income return. Otherwise, I doubt it, but you can always run the numbers both ways. It's worthwhile to understand taxes enough to at least estimate this yourself.
tomd37
Posts: 4097
Joined: Thu Mar 01, 2007 9:39 pm
Location: Middle Tennessee

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by tomd37 »

Katnok - Like another poster here previously mentioned, I very seldom (maybe one percent of the time) see where using married filing separately (MFS) filing status as being beneficial. Take a look online (www.irs.gov) at IRS publication 17, Chapter 2 about MFS filing status and in particular the Special Rules section.
Tom D.
GTBuzz
Posts: 205
Joined: Wed Apr 01, 2015 2:06 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by GTBuzz »

katnok wrote: Sat Dec 04, 2021 3:22 pm
GTBuzz wrote: Sat Dec 04, 2021 3:21 pm Do you have any children/dependents? If so, that may favor filing separately if the lower earning spouse can claim the children which might make them eligible for expanded child tax credits and $1400 recovery payments that would otherwise be phased out due to income if filing jointly.
Have 2 young kids.
I'm in the same boat. Somebody can correct me if I'm wrong, but given the incomes you stated, the combined Child Tax Credit and Third Economic Impact Payment for you under each filing status I believe would be as follows:

Married Filing Jointly:
$0 for 3rd EIP (assuming you did not qualify for the advance payments)
$4,000 for CTC (2 children x $2,000)
$4,000 Total

Married Filing Separately:
$4,200 for 3rd EIP (Spouse + 2 Dependents)
$7,200 for CTC (2 children 5 and under x $3,600)
$11,400 Total

Yes, you'll pay a higher effective tax rate on your income and might even trigger some additional Medicare or Investment Income taxes, which is why in most prior years MFJ would probably be the way to go. But given the *huge* potential difference in credits, it's very possible your total tax bill could still be *significantly* less by filing separate in 2021.
MechEngOSU
Posts: 93
Joined: Sat Mar 30, 2013 10:05 am

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by MechEngOSU »

GTBuzz wrote: Sat Dec 04, 2021 8:45 pm
katnok wrote: Sat Dec 04, 2021 3:22 pm
GTBuzz wrote: Sat Dec 04, 2021 3:21 pm Do you have any children/dependents? If so, that may favor filing separately if the lower earning spouse can claim the children which might make them eligible for expanded child tax credits and $1400 recovery payments that would otherwise be phased out due to income if filing jointly.
Have 2 young kids.
I'm in the same boat. Somebody can correct me if I'm wrong, but given the incomes you stated, the combined Child Tax Credit and Third Economic Impact Payment for you under each filing status I believe would be as follows:

Married Filing Jointly:
$0 for 3rd EIP (assuming you did not qualify for the advance payments)
$4,000 for CTC (2 children x $2,000)
$4,000 Total

Married Filing Separately:
$4,200 for 3rd EIP (Spouse + 2 Dependents)
$7,200 for CTC (2 children 5 and under x $3,600)
$11,400 Total

Yes, you'll pay a higher effective tax rate on your income and might even trigger some additional Medicare or Investment Income taxes, which is why in most prior years MFJ would probably be the way to go. But given the *huge* potential difference in credits, it's very possible your total tax bill could still be *significantly* less by filing separate in 2021.

+1
MFS saved us about $5k last year based on the interactions with child tax credits. With all these different changes the past year with credits, etc it's a great idea to run both scenarios. CPA ran both cases relatively easy for us, but if DYI it can be done easy enough in tax caster or HR block software too.

Your original question was if you could attribute the capital gains in the joint account to either you or your wife. I don't have the answer but am interested in the answer. We aren't in a community prop state, so that might be different too.
gionnovi
Posts: 45
Joined: Wed Dec 01, 2021 8:24 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by gionnovi »

Keep in mind that if you live in a community property state, you have to allocate the wages 50% to each spouse regardless of which spouse earned them. State law can also affect allocation of interest, dividends capital gains, etc.

Here is a couple articles that address the topic of allocating income between spouses.
https://www.irs.gov/publications/p555
https://turbotax.intuit.com/tax-tips/ma ... /L4jG7cq7Z
AnEngineer
Posts: 2407
Joined: Sat Jun 27, 2020 4:05 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by AnEngineer »

MechEngOSU wrote: Sun Dec 05, 2021 9:22 amWe aren't in a community prop state, so that might be different too.
I would be interested to know as well. When I looked I could find no guidance for non community property states. As far as I know, you can split up as you like.
tomd37
Posts: 4097
Joined: Thu Mar 01, 2007 9:39 pm
Location: Middle Tennessee

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by tomd37 »

AnEngineer
In a non-community property state the income is reported separately on each return and in accordance with the separate income and other documents that each person has in their name and social security number. I have prepared many married filing separately (MFS) tax returns over my years with the Tax Counseling for the Elderly and Volunteer Income Tax Assistance programs sponsored by the IRS. These returns were in such a state.
Tom D.
User avatar
quantAndHold
Posts: 10141
Joined: Thu Sep 17, 2015 10:39 pm
Location: West Coast

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by quantAndHold »

OP is in a community property state. There is no lower earning spouse. They each make $125k, and they each get $10k of the capital gains.
AnEngineer
Posts: 2407
Joined: Sat Jun 27, 2020 4:05 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by AnEngineer »

tomd37 wrote: Sun Dec 05, 2021 7:18 pm AnEngineer
In a non-community property state the income is reported separately on each return and in accordance with the separate income and other documents that each person has in their name and social security number. I have prepared many married filing separately (MFS) tax returns over my years with the Tax Counseling for the Elderly and Volunteer Income Tax Assistance programs sponsored by the IRS. These returns were in such a state.
What about income from joint accounts?
tomd37
Posts: 4097
Joined: Thu Mar 01, 2007 9:39 pm
Location: Middle Tennessee

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by tomd37 »

Income from a joint account has to be reported under one social security number and that would be where it is reported.
Tom D.
MarkNYC
Posts: 2986
Joined: Mon May 05, 2008 7:58 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by MarkNYC »

AnEngineer wrote: Sun Dec 05, 2021 4:46 pm
MechEngOSU wrote: Sun Dec 05, 2021 9:22 amWe aren't in a community prop state, so that might be different too.
I would be interested to know as well. When I looked I could find no guidance for non community property states. As far as I know, you can split up as you like.
For a brokerage account owned jointly by spouses in a non-community property state, the IRS will consider any gains or losses 50% allocable to each spouse.
AnEngineer
Posts: 2407
Joined: Sat Jun 27, 2020 4:05 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by AnEngineer »

I got two conflicting answers. Any authoritative sources?
MarkNYC
Posts: 2986
Joined: Mon May 05, 2008 7:58 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by MarkNYC »

AnEngineer wrote: Sun Dec 05, 2021 8:43 pm I got two conflicting answers. Any authoritative sources?
No authoritative source, just relating from experience the policy of the IRS. It's possible that certain states may have a law that provides a spouse's ownership or interest in a joint spouse account that differs from 50/50. If the spouses allocated on their tax returns in accordance with the state's provisions, that argument could be presented to the IRS, which the IRS may or may not accept. I can't think of any legal basis for the spouses allocating the gains or losses between them in any abitrary amounts they choose.
AnEngineer
Posts: 2407
Joined: Sat Jun 27, 2020 4:05 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by AnEngineer »

MarkNYC wrote: Sun Dec 05, 2021 8:53 pm
AnEngineer wrote: Sun Dec 05, 2021 8:43 pm I got two conflicting answers. Any authoritative sources?
No authoritative source, just relating from experience the policy of the IRS. It's possible that certain states may have a law that provides a spouse's ownership or interest in a joint spouse account that differs from 50/50. If the spouses allocated on their tax returns in accordance with the state's provisions, that argument could be presented to the IRS, which the IRS may or may not accept. I can't think of any legal basis for the spouses allocating the gains or losses between them in any abitrary amounts they choose.
How do you know that's the policy of the IRS? I could not find any guidance for non community property states.
MarkNYC
Posts: 2986
Joined: Mon May 05, 2008 7:58 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by MarkNYC »

AnEngineer wrote: Sun Dec 05, 2021 9:09 pm
MarkNYC wrote: Sun Dec 05, 2021 8:53 pm
AnEngineer wrote: Sun Dec 05, 2021 8:43 pm I got two conflicting answers. Any authoritative sources?
No authoritative source, just relating from experience the policy of the IRS. It's possible that certain states may have a law that provides a spouse's ownership or interest in a joint spouse account that differs from 50/50. If the spouses allocated on their tax returns in accordance with the state's provisions, that argument could be presented to the IRS, which the IRS may or may not accept. I can't think of any legal basis for the spouses allocating the gains or losses between them in any abitrary amounts they choose.
How do you know that's the policy of the IRS?
Based on professional experience.
AnEngineer
Posts: 2407
Joined: Sat Jun 27, 2020 4:05 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by AnEngineer »

MarkNYC wrote: Sun Dec 05, 2021 10:03 pm
AnEngineer wrote: Sun Dec 05, 2021 9:09 pm
MarkNYC wrote: Sun Dec 05, 2021 8:53 pm
AnEngineer wrote: Sun Dec 05, 2021 8:43 pm I got two conflicting answers. Any authoritative sources?
No authoritative source, just relating from experience the policy of the IRS. It's possible that certain states may have a law that provides a spouse's ownership or interest in a joint spouse account that differs from 50/50. If the spouses allocated on their tax returns in accordance with the state's provisions, that argument could be presented to the IRS, which the IRS may or may not accept. I can't think of any legal basis for the spouses allocating the gains or losses between them in any abitrary amounts they choose.
How do you know that's the policy of the IRS?
Based on professional experience.
I mean in a very literal sense. Did they tell you, did you read it? Or you're not sure because it's just part of your professional knowledge.
MarkNYC
Posts: 2986
Joined: Mon May 05, 2008 7:58 pm

Re: Does filing taxes "Married Filing Separately" make sense in our situation?

Post by MarkNYC »

AnEngineer wrote: Sun Dec 05, 2021 10:07 pm
MarkNYC wrote: Sun Dec 05, 2021 10:03 pm
AnEngineer wrote: Sun Dec 05, 2021 9:09 pm
MarkNYC wrote: Sun Dec 05, 2021 8:53 pm
AnEngineer wrote: Sun Dec 05, 2021 8:43 pm I got two conflicting answers. Any authoritative sources?
No authoritative source, just relating from experience the policy of the IRS. It's possible that certain states may have a law that provides a spouse's ownership or interest in a joint spouse account that differs from 50/50. If the spouses allocated on their tax returns in accordance with the state's provisions, that argument could be presented to the IRS, which the IRS may or may not accept. I can't think of any legal basis for the spouses allocating the gains or losses between them in any abitrary amounts they choose.
How do you know that's the policy of the IRS?
Based on professional experience.
I mean in a very literal sense. Did they tell you, did you read it? Or you're not sure because it's just part of your professional knowledge.
A couple of audits from years ago. I don't recall the specifics.
Post Reply