Article HighlightsReasons to File SeparateFiling ThresholdCommunity Property State IncomeJoint & Several LiabilitySocial Security Benefits Taxation ThresholdCapital Loss LimitationSec 179 LimitationRental Loss LimitationTraditional IRARoth IRASavings Bond Interest ExclusionHigher Education InterestStandard DeductionStandard Deduction vs Itemized DeductionsMedicare PremiumsHome Mortgage InterestSALT LimitationAlternative Minimum Tax (AMT)Tax RatesChild & Dependent Care CreditEarned Income Tax Credit (EITC)Adoption Tax CreditElderly & Disabled Tax CreditRetirement (Saver’s) CreditTax WithholdingEstimated Tax AllocationEstimated Tax High Income Safe HarborPremium Tax CreditAutomatic 2-month Extension When Out of the CountryMarried taxpayers generally have the option to file a joint tax return or separate returns, a filing status commonly referred to as married filing separate (MFS). If you are married and you and your spouse are filing separate returns, or are considering doing so, you should read this article before making that decision. Depending on whether the taxpayers are residents of a separate or community property state, their separate returns may include just the income and eligible expenses of each filer or a percentage of their combined income and expenses. Couples choose the MFS option for a variety of reasons:They want to avoid the joint and several liability for the tax from a joint tax return. Joint and several liability is a legal term for a responsibility that is shared by two or more parties to a lawsuit. A wronged party may sue any or all of them, and collect the total damages awarded by a court from any or all of them.They have children from a prior marriage and want to keep finances separate.They only want to keep their taxes separate.The marriage is tenuous.The taxpayers are separated and don’t want to cooperate in filing a joint return.One spouse might get a larger refund by filing separately (the other will pay more).They think they can save money by filing separate returns, and a variety of other reasons.The fact of the matter is that tax laws are carefully written to keep married taxpayers from filing separately to manipulate the tax laws to their benefit. The following is a list of the more commonly encountered tax disadvantages – some might call them tax penalties –when filing as MFS. Unless otherwise noted the amounts shown are for 2023: Filing Threshold – For all filing statuses except MFS the income threshold where a return must be filed is equal to the standard deduction for that filing status. For an MFS return the filing threshold is $5.Community Property State Income – Unlike most states where each spouse claims their own earned income on an MFS return, in community property states the earned income is evenly split between the spouses. However, FICA payroll withholding, self-employment tax, and IRA contributions apply separately to the spouse who earned the income.Joint & Several Liability – On a joint return both spouses can be held responsible for payment of the tax, while the spouses filing as MFS are only responsible for payment of the tax on their individual MFS returns. Social Security Benefits Taxation Threshold – Social Security (SS) income is not taxable until taxpayers filing married joint have modified AGI (MAGI) that exceeds a threshold of $32,000. MAGI is regular AGI (without Social Security income) plus 50% of their Social Security income plus tax-exempt interest income, and plus certain other infrequently encountered additions. However, the threshold is zero for taxpayers filing as MFS. Thus taxpayers filing as MFS are taxed on 85% of every dollar of SS income.Capital Loss Limitation –Where married couples filing jointly can annually deduct up to $3,000 of capital losses, those filing as MFS can only deduct up to $1,500.Sec 179 Limitation – Taxpayers can elect to expense the cost of qualifying property used in the active conduct of a trade or business. The portion of the cost not expensed under Sec 179 is depreciable. The maximum amount that can be expensed is inflation adjusted annually and is $1,160,000 for 2023 (up from 1,080,000 in 2022). For MFS taxpayers the annual maximum amount must be allocated between the spouses.Rental Loss Limitation – Generally, most taxpayers cannot deduct rental losses. However, there is a special rule that allows a deduction of aggregate losses from rental real estate activities up to $25,000 per year for taxpayers who are an active participant in the activity. It means that the taxpayer must participate in management decisions, and at least arrange for others to provide the necessary services such as repairs. However, this special allowance only applies to lower income taxpayers with an AGI, without regard to passive losses, of $150,000 or less. In addition the $25,000 loss allowance begins to phase out 50 cents for each $1 of income over $100,000. Thus the allowance is fully phased out for joint filers when the AGI exceeds $150,000. Phase out applies to gross income without considering passives, taxable Social Security benefits, or deductions for IRA. Taxpayers filing as MFS must live apart the entire year or they get no relief under this rule. If they lived apart all year, the allowance is $12,500, and phase out begins at income of $50,000Traditional IRA – For taxpayers filing joint returns, a Traditional IRA is tax deductible except that the deductibility is phased out for higher income taxpayers who are active participants in an employer retirement plan. Where both spouses are active participants in an employer retirement plan the deductibility of IRA contribution in 2023 phases out for AGIs between $116,000 and $136,000. Where only one spouse is an active participant the phase out is between $218,000 and $228,000. However, for those filing MFS the phaseout is between $0 and $9,999.