Author(s)
Everyone has to pay taxes — but no one needs to pay more than what the laws require. The IRS states that tax avoidance is perfectly legal and that taxpayers have the right to reduce, avoid, or minimize their taxes by legitimate means. These include homeowners claiming mortgage interest deductions or workers making tax-advantaged retirement plan contributions.[1]
Taxpayers can also manage their tax bills by choosing the most advantageous filing status. If more than one filing status applies to a taxpayer in a certain year, they can choose the one that generates the lowest tax.[2] However, the IRS does point out taxpayers sometimes misunderstand tax rules and end up paying more than they need to. This can be particularly true when it comes to the decision on whether to file under the married filing jointly (MFJ) or married filing separately (MFS) status options.
This issue brief first summarizes the statistics on the use of each filing status offered by the IRS today. It then discusses the evolution of federal income tax filing categories and the current income tax system when it comes to taxing families. Next, this brief reviews situations where the MFS filing status could be more beneficial for taxpayers than the MFJ option as well as factors to understand when couples are considering the MFS filing status.[3]
MFS Filings Are on the Rise
Currently, taxpayers can choose from five filing categories when preparing their federal income tax returns: single, married filing jointly (MFJ), married filing separately (MFS), head of household (HOH), and qualifying widow/widower with dependent child (qualifying widow(er)).
Over the last 20 years, there have been noticeable changes in the usage of each filing status. Tables 1 and 2 show that there have been changes both within a given year and also across time for each category. Overall, analysis indicates consistently small numbers of MFS returns — but it also shows that this is the fastest-growing category among all filing categories today.
Table 1 — Number of IRS Returns by Filing Status
Table 2 — Percentage of IRS Returns by Filing Status
From 2003 to 2020 (the years with available data), the total number of Form 1040 returns increased by a quarter (26%).[4] Outpacing this overall growth rate is the number of single filers (increased by 47%) and MFS filers (increased by approximately 70%). On the other hand, the number of MFJ filers increased by 7%, below the overall growth rate of total returns. The changes of both the HOH and widow(er) filers were also below average across this period.
For example, in 2003, 44% of the filers were single. This percentage increased to 51% in 2020, while MFS filers grew from 1.8% to 2.4% during this same time period. Meanwhile, the number of MFJ filers decreased from 40% to 34% between 2003 and 2020.[5]
The trends are similar for periods that are more recent. Between 2010 and 2020, the total number of returns increased by 15%. Single filers increased by 29% and MFS filers increased by 55%, both higher than the overall increase. Meanwhile, the number of MFJ filers only increased by 3%, once again lower than the overall growth rate. Single year data for 2018 and 2019 also showed that this trend persisted even after the Tax Cuts and Jobs Act of 2017 (TCJA), indicating the law did not significantly alter taxpayers’ choice of filing statuses.
Current Tax System Does Not Solve All Tax Issues for Married Couples
Married taxpayers can typically choose to file jointly or separately. However, when the only concern in choosing a specific filing status is the amount of taxes that will be owed, it is important to understand some basic structures of the tax code that can affect this decision. These factors are discussed below and are particularly important when it comes to families.
A Congressional Budget Office (CBO) study describes that the Federal income tax system has three objectives relevant to the taxation of families as follows:
- Equal treatment of married couples, meaning that households with the same income pay the same amount of tax, regardless of who earns the income.
- Progressive taxation, meaning that taxpayers with higher incomes pay higher taxes at higher rates.
- And finally, marriage neutrality, meaning that a couple’s marital status should not influence their tax liability. [6]
However, the study also describes simultaneously satisfying all three objectives as “the unattainable ideal” and explains that the current tax system can only meet two, but not all three, criteria at the same time. Sacrificing the first or second objective would mean either increasing the tax payment for single-income families or switching to a flat tax system, both of which are highly undesirable political choices. Therefore, compromising marriage neutrality is a more viable alternative at the present time — even though it can often lead to a marriage penalty, which means two taxpayers pay higher combined taxes when they marry. In addition to higher tax payments, the marriage penalty can also take the form of reduced tax credits or lower tax preferences. On the other hand, there are also times when marriage can lead to lower joint taxes, which is often called a marriage bonus or marriage benefit.
Although the occurrence of a marriage penalty or bonus depends heavily on the circumstances of the particular taxpayers, a Joint Committee on Taxation (JCT) report points out three factors that have the greatest influence: the couple’s income level, the number of children, and the division of income between the couple.[7]
A great deal of legislation over the last few decades has attempted to address the marriage penalty issue, mostly to control its magnitude within what is considered an acceptable level.[8] The typical policy options chosen have included widening the tax brackets and raising the standard deduction for joint filers (most commonly used); implementing a second-earner deduction (used between 1981 and 1986 and repealed in the Tax Reform Act of 1986); and offering an optional separate filing status for married couples. [9] The most recent legislative example is the TCJA, which followed the first approach. Specifically, the TCJA modified tax rate brackets to alleviate the magnitude of the marriage penalty. However, issues for married couples remain in other relevant areas including the Additional Medicare Tax, Social Security, and the Earned Income Tax Credit (EITC).[10]
History Shows That Filing Separately Is Not Intended to Solve the Marriage Penalty
Some taxpayers associate the MFJ status with a marriage penalty and, by extension, believe using the MFS status can eliminate the problem. A brief review of history regarding these topics shows that this belief is incorrect.
The U.S. federal individual income tax system began in 1913. Different from today’s system of treating families as a tax unit, it was an individual-based tax system. There was only one rate schedule for all taxpayers. This meant there was no marriage penalty since the first of the three objectives in the current tax system was not being considered at the time.
That changed in 1948, when Congress adopted “income splitting” to equalize tax treatments of couples across states.[11] Under this mechanism, the joint tax liability for married couples was calculated as twice of the tax liability on half of their combined income. Although the rationale for federal adoption of what was called “income splitting” mostly had to do with balancing state tax concerns, it did create a distinct separation between “family” and “individual” returns. As long as the couple had two unequal incomes, this rate structure actually created a marriage bonus for families, which was seen by some as a tax subsidy for marriage.[12]
By 1969, a single person’s tax liability could be as much as 40% higher than that of a married couple at the same income level. In response, Congress created a separate rate schedule for single taxpayers. Under this new schedule, a single taxpayer could never pay more than 20% of what married couples with the same income would pay in taxes. The other side of that coin was the possibility that a single taxpayer could end up paying more taxes after they got married. In other words, the creation of the singles rate schedule was the beginning of a marriage penalty.
Researchers point out that, even in the 1960s, couples could always file separate returns. However, the rate schedule for separate returns was higher than that of single or joint returns, making the option to file separately meaningless.[13] In most cases, MFS couples would at best end up with the same tax liability as they would have under the MFJ option (except in cases where one spouse had significant medical bills that could be deducted if they exceeded a percentage of income, for example[14]).
Therefore, the development of treating families as taxing units, having separate rate schedules for different return filers, and the increasing number of two-earner families, all gradually moved the tax system closer to “the unattainable ideal.” As some tax researchers stated, a marriage penalty is not a statutory item embedded in the tax code; instead, it was created because of other considerations affecting tax law.[15] Therefore, unless the tax code forgoes the progressive rate structure or moves to an individual system, the viable policy options available to address the marriage penalty are limited to the ones discussed in the previous section. As a result, the MFS filing status may help certain taxpayers in specific situations, but it is not a comprehensive tool to eliminate or curtail the marriage penalty.
Growing Media Attention Highlights the Importance of Knowing the Facts
The increase of MFS returns has attracted media attention in recent filing seasons. For instance, a Wall Street Journal article featured a married couple who filed separate returns and was able to reduce their student loan payments by $760 per month. This article showed that after 10 years of payment, roughly 85% of the original balance would be forgiven (an amount of approximately $170,000).[16] However, these types of articles seem to offer conflicting advice. For example, one article pointed out that MFS helps couples with similar income levels,[17] whereas another said couples with income disparity are more likely to benefit.[18] Overall, whether the MFS is more favorable than the MFJ is an empirical issue instead of a one-size-fits-all set of rules that qualify families for MFS benefits. The following section summarizes a list of tax and non-tax characteristics that can help identify taxpayers more likely to benefit from choosing the MFS option. [19]
There Are a Number of Good Reasons to Choose the MFS Option
Some of the primary reasons to choose the MFS option are described below.
Substantial unreimbursed medical expenses: The most typical reason a couple would choose to file separately is when one spouse has large unreimbursed medical bills but not a corresponding income level. The reason is that medical bills are only deductible if they exceed a certain percentage of income, and combining both spouses’ income makes it more difficult for medical expenses to obtain the preferential tax deduction treatment. In addition, this tax-deductible benefit is only applicable if both taxpayers itemize (as discussed further below).
Liability protection: If one spouse engages in shady transactions but the other does not, or they simply want to maintain independent financial lives, the MFS may be a viable option. Signing a joint return means that each party is “jointly and severally” responsible for the accuracy of the return and the entire tax liability. [20] This obligation not only applies to the amount presented on the tax return, but also the potential assessment determined by the IRS — even if that additional assessment comes from transactions committed by only one spouse or former spouse. It is possible to file an “innocent spouse” claim to alleviate this liability; however, taxpayers need to satisfy several criteria before the IRS grants this relief. [21]
Student loans: Many student loan borrowers are enrolled in income-driven repayment (IDR) programs, of which there are multiple types. One common feature of IDR programs is that they calculate monthly payments as a share of the borrower’s discretionary income, ranging from 10% to 20%, and often specify a dollar amount cap on this payment. In addition, IDR programs forgive the remaining loan balances after a certain number of years of timely payments, typically between 20 and 25 years. These forgiven balances are considered taxable income.
One income-driven program, called Public Service Loan Forgiveness (PSLF), was established in 2007. The PSLF allows borrowers who work for a government or not-for-profit organization to receive loan forgiveness after 10 years of repayment. Besides the shorter repayment period to obtain loan forgiveness compared to other IDR programs, the loan balance cancelled is not taxable income.[22] This is obviously a significant advantage.
Under these IDR programs, the income claimed on a borrower’s tax return is generally used as a starting point for calculating the monthly repayment amount. As such, if a spouse has a large student loan balance, filing MFS may reduce their monthly payment because the other spouse’s income is not considered. In addition, the balance will be forgiven after a specific number of years of repayment.
Qualified Business Income: If one spouse is a business owner but the other is not involved in the business, filing separately may qualify the owner spouse for the 20% Qualified Business Income (QBI) deduction established under the TCJA. [23] Since reductions to QBI benefits kick in after income exceeds $170,050 for single and $340,100 for MFJ filers, including both spouse’s income may prevent the business owner from getting the QBI deduction. [24]
Special Limitations on MFS Tax Advantages Can Affect Its Desirability
After reviewing the common reasons for adopting the MFS, it is important to recognize the restrictions associated with this filing status. Some of these considerations require coordination between taxpayers, whereas others disallow or limit tax benefits. Possible restrictions to consider are described below.
Deduction limits: Taxpayers can choose to itemize or not under the MFS filing status; however, both spouses need to elect the same type of deduction. If they decide to take the standard deduction, the amount allowed is half of the MFJ standard deduction for each return. For instance, the 2022 tax year MFS standard deduction amount was $12,950 — half of the MFJ amount ($25,900). In cases where both spouses itemize, the amount is shared equally between the two returns.
Several other deduction thresholds are also split in the middle. These include the state and local tax deduction ($10,000 joint or $5,000 each), the homeowner seller’s exemption ($500,000 joint or $250,000 each), the capital loss deduction that can offset ordinary income ($3,000 joint or $1,500 each), and the net investment income threshold amount ($250,000 joint or $125,000 each).
The Child and Dependent Care Credit: This is a tax benefit for working taxpayers who incur childcare expenses, including payments to babysitters, daycare facilities, preschools, or summer camps. Every year, each dependent is eligible for $3,000, for up to a total of $6,000 allowed credits per family. However, the IRS clearly states that MFS filers are not eligible for this credit.[25]
The Earned Income Tax Credit (EITC): This is one of the most important federal income-assistance programs for low- to moderate-income working families. MFS filers meeting the income requirements can apply for the credit; however, the taxpayer needs to have lived apart from his or her spouse during the last six months of the filing year or be legally separated from the spouse.[26]
Educational credits: The American Opportunity Tax Credit (AOTC) provides up to $2,500 tax credit annually for the first four years of higher education and is partially refundable. MFJ filers qualify for this credit if their income is under $180,000. The Lifetime Learning Credit (LLC) allows taxpayers, dependents, or third parties (e.g., parents) to claim qualified tuition for post-secondary education and related expenses for up to $2,000 per return, per year. MFJ filers with income under $180,000 are eligible, and there is no limit for the number of years a taxpayer can claim the LLC. However, MFS filers are ineligible for either the AOTC or the LLC. [27]
Roth IRA contributions: In 2022, the income limit for making a Roth IRA contribution was $228,000 for MFJ filers and $153,000 for single filers. However, the limit plummets to $10,000 when a household files separate returns.[28] For traditional IRAs, the deductibility of a contribution also depends on whether the other spouse is covered by a retirement plan at work.[29]
Student loan considerations: Typically, student loan borrowers can deduct interest of up to $2,500 per year as long as the MFJ filers’ income was lower than $175,000 in 2022. However, MFS filers cannot claim student loan interest deductions on their returns.[30] Other limitations include restrictions on adoption-related expenses, [31] higher portions of taxable Social Security benefits,[32] and a disallowed exclusion of U.S. savings bond interest.[33]
Other Factors to Consider
Choosing the MFS option affects a taxpayer’s ability to amend a return. From a technical perspective, a taxpayer’s marital status is determined as of the last day of the filing year. If a taxpayer is married on December 31, he or she can choose to file jointly or separately from the spouse. However, the MFJ versus MFS filing decision can change annually, and there are no rules prohibiting couples from switching between these two status options in different years. This is important because, within the same filing year, couples may amend their MFS returns to become MFJ after they file their returns — but once the couple files a MFJ return, they cannot amend and file separately.
In addition, some tax practitioners believe MFS returns are more likely to receive IRS reviews.[34] Although this is unconfirmed, others point out the MFS filing status may prolong a return’s processing time because it takes the IRS longer to untangle the incomes and deductions from two returns.[35]
The Conclusion: Know the Facts and Choose Carefully
The number of MFS returns has showed higher than overall growth rates over the last two decades. Several issues are relevant to this phenomenon. First, the MFS status does not automatically eliminate the marriage penalty. The most common policy option to alleviate the marriage penalty imposed on some couples filing MFJ in recent history has been to widen tax brackets and raise the standard deduction for joint filers. The TCJA adopted this option.
Most importantly, whether or not taxpayers should file MFS is an empirical question that is situation dependent. The MFS option involves filing two separate returns, but they are not two individual returns like the ones filed by single taxpayers when it comes to deductions and certain tax benefits. However, taxpayers may choose the MFS option for non-financial related considerations, such as liability or privacy protection — even if this means they will pay more taxes.
If taxpayers do choose the MFS status, they should recognize associated limitations on benefits and qualifications, including child and dependent care credits, the EITC, Roth IRA contributions and Social Security benefits.
Some financial attributes and family characteristics may indicate certain households are more likely to benefit from the MFS. However, it is important to bear in mind that interactions with other provisions of the tax law, macroeconomic environments, policy changes, and social considerations may all affect the future trend of MFS filing status — and whether it is the right option for a couple to choose.
Endnotes
[1] IRS, “Understanding Taxes: the Difference between Tax Avoidance and Tax Evasion,” last visited May 24, 2023, https://apps.irs.gov/app/understandingTaxes/whys/thm01/les03/media/ws_ans_thm01_les03.pdf.
[2] IRS, “Publication 501: Dependents, Standard Deduction, and Filing Information,” September 9, 2022, https://www.irs.gov/pub/irs-pdf/p501.pdf (see pages 5-7, “Filing Status”).
[3] The filing status may have state tax implications especially for community property states. Specific rules for these states are beyond the scope of this brief. See “Publication 555, Community Property,” for details. https://www.irs.gov/forms-pubs/about-publication-555.
[4] This is calculated as (164,358,792-130,423,625)/ 130,423,625 = 26%. Other growth rates are similarly calculated.
[5] IRS, “Individual Income Tax Returns Line Item Estimates, 2020, Statistics of Income Publication 4801,” revised November 2022 (see page 14 for Form 1040 estimates), https://www.irs.gov/pub/irs-pdf/p4801.pdf.
[6] CBO (Congressional Budget Office), “For Better or For Worse: Marriage and the Federal Income Tax,” June 1997, https://www.cbo.gov/sites/default/files/105th-congress-1997-1998/reports/marriage.pdf.
[7] Joint Committee on Taxation, “Overview of Present Law and Economic Analysis Relating to the Marriage Tax Penalty, The Child Tax Credit, and The Alternative Minimum Tax,” March 8, 2001, https://www.jct.gov/CMSPages/GetFile.aspx?guid=ec80bef5-01ba-427d-9f01-6d394224a72e.
[8] For example, these include the Taxpayer Relief Act of 1997, the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, the Working Families Tax Relief Act of 2004, the American Recovery and Reinvestment Tax Act of 2009, and the American Taxpayer Relief Act of 2012.
[9] For the pros and cons of these policy options, see Gregg A. Esenwein, “Marriage Tax Penalties: Legislative Proposals in the 106th Congress,” July 14, 2000, CRS Report RL 30420, https://www.everycrsreport.com/reports/RL30420.html.
[10] Joyce Beebe, “The Marriage Penalty after the TCJA: Effects on High- and Low-income Households and the Elderly,” Baker Institute Issue Brief, March 26, 2019, https://www.bakerinstitute.org/research/marriage-penalty-after-tcja.
[11] Specifically, couples in community property states were allowed income splitting, but households in common property states were not, creating a disparity across the country. For details, see CBO, “For Better or For Worse: Marriage and the Federal Income Tax,” 6-7.
[12] Jane Gravelle, “Federal Income Tax Treatment of the Family, Congressional Research Service,” Congressional Research Service, RL 33755, version 18, November 23, 2016, https://crsreports.congress.gov/product/pdf/RL/RL33755.
[13] Harvey Rosen, “The Marriage Tax is Down but Not Out,” National Tax Journal 40, no. 4, (December 1987): 567-576, https://www.nber.org/papers/w2231.
[14] Rosen, “The Marriage Tax is Down but Not Out,” footnote 4.
[15] Leslie A. Whittington and James Alm, “Tax Reductions, Tax Changes, and the Marriage Penalty,” National Tax Journal 54, no. 3 (September 2001): 455-472, https://www.jstor.org/stable/41789563?seq=1#page_scan_tab_contents.
[16] Laura Saunders, “The Tax Play That Saves Some Couples Big Bucks,” The Wall Street Journal, March 3, 2023, https://www.wsj.com/articles/married-filing-separately-vs-jointly-taxes-f9f45ad2.
[17] The Investopedia Team, “Married Filing Separately Explained: How It Works and Its Benefits,” Investopedia, February 22, 2023, https://www.investopedia.com/terms/m/mfs.asp.
[18] William Perez, “Is the Married Filing Separately Tax Status Right for You?” The Balance, January 17, 2023, https://www.thebalancemoney.com/married-filing-separately-3193041.
[19] Practitioners also indicate the MFS may enhance pandemic-related benefits. However, most of them have expired. See Kelly Phillips Erb, “Is Married Filing Separately The Right Tax Filing Status For You?” Forbes, March 17, 2023, https://www.forbes.com/sites/kellyphillipserb/2023/03/17/is-married-filing-separately-the-right-tax-filing-status-for-you/?sh=3888594f7ad.
[20] Taxpayer Advocate Service, “TAS Tax Tip: Got Married? Here are Some Tax Ramifications to Consider and Actions to Take Now,” October 27, 2021, https://www.taxpayeradvocate.irs.gov/news/tas-tax-tip-got-married-here-are-some-tax-ramifications-to-consider-and-actions-to-take-now/.
[21] IRS, “Instructions for Form 8857,” revised June 2021, https://www.irs.gov/instructions/i8857.
[22] Joyce Beebe, “The Current Student Loan Landscape and Recent Developments,” Baker Institute Issue Brief, December 14, 2018, https://www.bakerinstitute.org/research/current-student-loan-landscape.
[23] J.R. Whalen, “Why Some Married Couples File Taxes Separately,” The Wall Street Journal, March 7, 2023, https://www.wsj.com/podcasts/your-money-matters/why-some-married-couples-file-taxes-separately/522c5d21-e805-4a1b-a509-0976deec2f4e; John Masselli, “Taxpayer Marital Status and the QBI Deduction,” The Tax Advisor, December 1, 2022, https://www.thetaxadviser.com/issues/2022/dec/taxpayer-marital-status-and-the-qbi-deduction.html.
[24] All income and benefit amounts in this section, unless otherwise indicated, are numbers relevant to the 2022 tax filing season.
[25] IRS, “Topic No. 602, Child and Dependent Care Credit,” April 6, 2023, https://www.irs.gov/taxtopics/tc602.
[26] IRS, “Who Qualifies for the EITC,” April 12, 2023, https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/who-qualifies-for-the-earned-income-tax-credit-eitc.
[27] IRS, “Education Credits--AOTC and LLC,” January 27, 2023, https://www.irs.gov/credits-deductions/individuals/education-credits-aotc-llc.
[28] IRS, “Amount of Roth IRA Contributions That You Can Make For 2023,” October 26, 2022, https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2023.
[29] IRS, “2022 IRA Contribution and Deduction Limits Effect of Modified AGI on Deductible Contributions if You are NOT Covered by a Retirement Plan at Work,” September 22, 2022, https://www.irs.gov/retirement-plans/plan-participant-employee/2022-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-not-covered-by-a-retirement-plan-at-work.
[30] IRS, “Topic No. 456, Student Loan Interest Deduction,” April 6, 2023, https://www.irs.gov/taxtopics/tc456.
[31] IRS, “Topic No. 607, Adoption Credit and Adoption Assistance Programs,” April 6, 2023, https://www.irs.gov/taxtopics/tc607.
[32] IRS, “Filing Season Reminder: Social Security Benefits May be Taxable,” May 12, 2021, https://www.irs.gov/newsroom/filing-season-reminder-social-security-benefits-may-be-taxable.
[33] For details, see IRS, “Publication 501: Dependents, Standard Deduction, and Filing Information.”
[34] Kate Dore, “Here is When Married Filing Separately Makes Sense, According to Tax Experts,” CNBC, February 24, 2022, https://www.cnbc.com/2022/02/24/heres-when-married-filing-separately-makes-sense-tax-experts-say.html.
[35] Laura Saunders, “When 'Married, File Separately' Lowers Your Tax Bill,” The Wall Street Journal, February 23, 2018, https://www.wsj.com/articles/when-married-filing-separately-lowers-your-tax-bill-1519381801.
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