Married couples have an option to either choose Married Filing Jointly (MFJ) or Married Filing Separately (MFS). One common question that often comes up for newly married couples and married couples moving to Washington state is “Which one is best for us?”
First and foremost, the State of Washington is community property state. This means that income is paid into the marital community and all expenses are paid out of the marital community. Income variations amongst spouses is not relevant because all income is pooled into the marital community.
Married couples residing in a community property state who file separate federal tax returns must fully understand the community property tax laws for their state, and the IRS requirements for filing separately. The couple needs to identify their community income and community deductions. Generally, the majority of deductions must be split evenly, with each spouse reporting half of the total deductions. Some deductions, however, must be allocated separately. And still other deductions may have a mixed allocation.
If you choose MFS as your filing status, many tax credits are disallowed if you file separate returns. If one spouse itemizes deductions, the other must too, even if he or she has none to itemize–in which case, the deduction is a $0. Following are some disadvantages of Married Filing Separately:
"Our tax liability comes out lower on our returns using the Married Filing Separately type, so there must be something else!"
Even if none of the forfeited credits listed above are applicable, the preparer must ensure that all standard deductions, exemptions, itemized deductions and credits are being allocated properly and precisely across the two returns. Additionally, married couples filing separately must either both itemize or both take the standard deduction--and in doing so, properly allocate the itemized deductions or standard deductions amongst the two individuals. In other words, the preparer must ensure that they didn't "double-dip" any credits or deductions.
Identifying and tracking these credits, deductions and exemptions across two returns can be incredibly complex to identify because myriad calculations are conducted on supporting tax worksheets in the background. Consumer tax software isn't necessarily programmed to cross-check the returns for these calculations. In our experience, these are common errors we've immediately discovered upon evaluating self-prepared returns with a married filing separately status.
There are literally thousands of computations for every tax profile scenario, and if you're not versed in tax law, you risk filing an inaccurate return (that may subject you to hefty penalties, interest owned on underpayment, plus paying the tax due).
If you do choose to file separately, the IRS will probably really wonder why a couple in a community property state is filing separate returns. When the IRS begins to question, that's generally a recipe in the making for an audit. Therefore, unless there is a specific, clear purpose that substantiates a need (i.e., you're attempting to bring forth information vs. hiding information), Married Filing Separately in a community property state is generally disadvantageous and provides heightened exposure for an audit.