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Does anyone know when filing separately might be better than filing jointly?
Our situation might be a bit odd... we each have > $100k in student loan debt, and we both own a home in our own names (we rent my house out and live in his). We each make about the same ($65k).
I noticed going through TurboTax that we were only getting to deduct about $1k of the $18k student loan interest we pay every year, and I'm wondering if it might be more beneficial to file separately.
Thanks
Last edited by tabbcat; 02-03-2009 at 06:37 AM..
Reason: i'm an idiot
You cannot deduct the student loan interest at all if you file "Married Filing Separately". The maximum student loan interest deduction is $2,500, but yours is only $1,000 because your combined gross income is more than $110,000. It is NOT a tax "credit", but a deduction from income. In other words, you don't pay taxes on $1,000 of your gross income.
Overall the mortgage deduction should be the same no matter how you file. You can deduct mortgage interest for a first and second home, so you can deduct the items for both your house and your wife's all on the same tax return if you file jointly. If you decide to file separately, you can each deduct your own home interest. But since you rent out one of the houses, you will have to count the rent as income.
It is usually best to file jointly. I can't really think of any situation in which it is best to file separately. Maybe someone with more tax experience than me can enlighten us.
For the rental house, you will be filing a Schedule E (Turbotax will walk you through all of it). You will be able to deduct a lot of expenses related to it, a lot more than just the mortgage interest.
But I agree, it sucks. You paid $18K of student loan interest, and can only deduct $1K. I think that deduction was created when college was a lot cheaper. Since the deduction is so small compared to what you pay, I would aggressively pay that debt off (but pay off consumer debt first).
Married Filing Seperately is never advantageous to use, IMO.
When MFS, there are certain deductions and credits that you are not allowed you claim. And if one person itemizes, the other must itemize as well, even if they don't have enough itemized deductions to gain any benefit. Remember, when you MFS, you have to put your spouse's SSN on your form, and the IRS will verify that the spouse is filing the same way. A lot of people get in trouble that way. For all that trouble, file joint.
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The other thing with married filing separately is if one of you itemizes, the other has to, too--even if their itemizations are less than the standard deduction.
The only time I can think of where it would be advantageous is if one person makes significantly more than the other. Or if one person has expenses subject to income limitations. For example, if one person has deductible medical expenses (which are subject to the 7.5%). Then again if you're in a community property state, it gets even stickier.
I am married filing separately and it stinks. My husband is a good man and an honest man but he has his own business [schedule C] and is an accounting nightmare. After a few years of fights over his shoebox accounting and filing late returns due to having to reconstruct lost paperwork, I decided to my own separately.
We keep all of our finances separate [e.g., the mortgage is in my name only - he pays other things] since he is schedule C he itemizes. Not ideal by a long shot but our marraige is healthy otherwise.
It DOES hurt; I cannot do an IRA on top of my other retirement, my taxes are a bit higher than they would be, etc. and I could not deduct college related costs for my kids.
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