Married Filing Separately

Married Filing Separately (MFS) is often called the "penalty status" because it usually results in higher combined taxes than Married Filing Jointly (MFJ). However, MFS exists for important reasons and can be the optimal choice in specific circumstances. Understanding both the restrictions and strategic uses of MFS is essential for the EA exam.

Who Can File MFS?

Any legally married taxpayer can choose MFS. You are considered married for tax purposes if you are:

• Legally married under state law on the last day of the tax year (December 31)
• Living apart but not legally separated under a divorce or separate maintenance decree
• In a common-law marriage recognized by the state where you live

Important: Same-sex married couples are treated identically to opposite-sex married couples for federal tax purposes.

2024 Standard Deduction and Tax Brackets

The MFS standard deduction and tax brackets are exactly half of the MFJ amounts:

Standard Deduction:

• MFJ: $29,200
• MFS: $14,600 (exactly half)

Additional Standard Deduction (65+ or blind): $1,550 per qualifying condition per spouse

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The Itemization Trap

One of the most important MFS rules for the EA exam is the itemization requirement:

If one spouse itemizes deductions, the other spouse MUST also itemize.

This creates a "trap" that can harm the non-itemizing spouse:

Example: John and Sarah file MFS. John has $20,000 in itemized deductions and chooses to itemize. Sarah has only $3,000 in itemized deductions. Because John itemizes, Sarah CANNOT claim the $14,600 standard deduction. She must itemize her $3,000, losing $11,600 in deductions.

Practical Impact: Before choosing MFS with itemized deductions, both spouses must calculate whether the benefit to one spouse outweighs the cost to the other.

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Credit and Deduction Restrictions

MFS is the most restrictive filing status for tax benefits. Here's what MFS filers cannot claim or have severely limited:

Credits NOT Available to MFS Filers:

*The ARPA exception: MFS filers may claim EITC if they lived apart from their spouse for the last 6 months of the year AND have a qualifying child who lived with them for more than half the year.

Deductions and Limits Reduced for MFS:

Traditional IRA Deduction: The $10,000 Cliff

The IRA deduction restriction is particularly harsh for MFS filers. If you are covered by a retirement plan at work and file MFS:

• Full deduction: MAGI of $0 or less
• Partial deduction: MAGI between $0 and $10,000
• No deduction: MAGI of $10,000 or more

Compare this to MFJ, where the phase-out ranges from $123,000 to $143,000 for 2024.

Exception: If you did NOT live with your spouse at any time during the year, you are treated as Single for IRA deduction purposes, with a much higher phase-out range.

Social Security Taxation: Automatic 85%

For MFS filers who lived with their spouse at any time during the year:

• 85% of Social Security benefits are automatically taxable
• No base threshold calculation applies

Compare this to MFJ:

• 0% taxable if provisional income is under $32,000
• Up to 50% taxable if provisional income is $32,000 - $44,000
• Up to 85% taxable only if provisional income exceeds $44,000

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Community Property States

Filing MFS in a community property state adds complexity. In these states, income earned during marriage generally belongs equally to both spouses, regardless of who earned it.

The 9 Community Property States (2024):

1. Arizona (AZ)
2. California (CA)
3. Idaho (ID)
4. Louisiana (LA)
5. Nevada (NV)
6. New Mexico (NM)
7. Texas (TX)
8. Washington (WA)
9. Wisconsin (WI)

How Community Property Affects MFS Filing:

When filing MFS in these states, each spouse must report:

• 50% of all community income (wages, self-employment, investment income from community property)
• 100% of their separate income (income from property owned before marriage or acquired by gift/inheritance)

Form 8958 is used to allocate tax amounts between spouses in community property states.

Spanish Rule vs. American Rule:

States differ on how they treat income from separate property:

Exception for Separated Spouses: If you lived apart for the entire year and did not file a joint return, community property rules may not apply, and each spouse can report only their own income.

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When MFS Makes Sense

Despite its drawbacks, MFS is the optimal choice in several scenarios:

1. Student Loan Income-Driven Repayment (IDR)

For borrowers on IBR, PAYE, or SAVE repayment plans, monthly payments are based on AGI. Filing MFS uses only the borrower's income rather than combined household income.

Example:

• Spouse A: $30,000 income, $100,000 federal student loans
• Spouse B: $150,000 income, no student loans

In this scenario, MFS saves the couple over $9,000 annually despite the higher tax cost.

2. High Medical Expenses (7.5% AGI Threshold)

Medical expenses are deductible only to the extent they exceed 7.5% of AGI. Filing separately can lower one spouse's AGI, making more medical expenses deductible.

Example:

• Combined AGI: $100,000 (7.5% threshold = $7,500)
• Spouse A's AGI if filing MFS: $25,000 (7.5% threshold = $1,875)
• Spouse A's medical expenses: $6,000

3. Protecting from Spouse's Tax Liability

When spouses file jointly, both are jointly and severally liable for the entire tax due, plus penalties and interest. This means the IRS can collect the full amount from either spouse.

Filing separately protects you if:

• Your spouse has unpaid taxes from prior years
• You suspect your spouse is underreporting income or inflating deductions
• You are in the process of divorce
• You want to limit audit exposure

4. Spouse with Injured or Innocent Spouse Issues

While Innocent Spouse Relief (Form 8857) exists for joint filers, filing separately prevents the problem entirely. You avoid liability for your spouse's tax issues.

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MFJ vs. MFS Comparison Summary

*Exception applies if lived apart last 6 months with qualifying child.

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Exam Strategy

Watch for these EA exam triggers:

1. "One spouse itemizes..." - The other spouse MUST also itemize
2. "Student loan payments..." - Consider MFS for IBR/PAYE
3. "High medical expenses..." - Consider MFS to lower 7.5% AGI threshold
4. "Concerned about spouse's tax situation..." - MFS provides liability protection
5. "Community property state..." - Remember the 50/50 income split
6. "IRA deduction, MFS..." - Phase-out is only $0 - $10,000