Now that Valentine’s Day has passed, it’s time to talk about an income tax situation that will make you love your tax professional almost as much as you love your significant other!
At JFTS we get a lot of married couples who come to us looking to file their income tax return separately. After a few follow-up questions we find out that the reasoning is that one spouse has a past debt, either child support, student loans or a past tax debt, all of which can be taken from a tax refund. The couple feels that the only way to keep their refund is to file separate and they forget to realize that there is another way. It’s called Injured Spouse Allocation!
Injured Spouse Allocation
What is Injured Spouse Allocation?
It is a provision in the tax code that the IRS setup for this particular situation where one spouse has a past collectible debt that the other spouse is NOT liable for paying. This way couples do not have to commit “tax return suicide” by filing separately and killing their tax refund entirely just to make sure that their refund does not get taken away. The irony is that filing separate almost guarantees that NEITHER spouse will get a significant refund. WHY?
When you file separately one of the credits that is unavailable is the Earned Income Tax Credit(EITC or EIC). This is the credit that most low-mid income earners with children depend on for large refunds and can be up to $5751 for married couples who have 3 children and are usually between $25k-$35k in combined earned income. Another major credit that is unavailable to separate filers is the Adoption Credit. This credit, which just became refundable in 2010 and 2011, can be up to $13,360 for each qualifying child adopted. In addition to less available credits, the income tax brackets are higher, so an income level that might’ve been taxed at 10% for a joint couple might fall into the 15% level for separate filers.
In fact, we had a client in this situation who felt it was better to file separate instead of joint despite adopting two (2) special needs children. If they filed separately not only would neither spouse have been entitled to a refund, they both would’ve OWED money, a lot of money! However, thanks to Injured Spouse Allocation they received over $20,000 in federal refund! From this $20,000 only a small portion was applied to the “injured” spouse’s past debts and it was a happy ending.
For anyone who wants to file Injured Spouse Allocation, here’s what you need to qualify per IRS regulations:
- File Married Filing Jointly(MFJ)
- Only ONE spouse can have “legally enforceable” past-due debts which include: Federal Tax, State Income Tax, Child Support, Spousal Support, Federal Nontax Debt(i.e. Student Loans)
One situation that might complicate matter is if you reside in a “Community Property State”(AZ, CA, ID, LA, NV, NM, TX, WA or WI) at any time during the year. While this won’t necessarily disqualify you from Injured Spouse Allocation, it will reduce the benefit somewhat. Like ALL tax matters it is dependent on your specific situation and the only way to know is to speak with an income tax professional, such as a JFTS Tax Patriot.
With all that said, when should you file Married Filing Separately(MFS)? Answer- ALMOST NEVER.
The only situation that would make sense filing separately is if there is a spouse who has left the state or country and there is no possibility of getting their signature on a joint return. Otherwise, even in cases of divorce or separation, if there are dependents involved there is a special filing status known as “Married, but Unmarried for Tax Purposes” and it is similar to the Head of Household(HOH) filing status. Since this is a complex income tax matter it is best to check with a Tax Patriot first to see if you qualify.
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