Wow! Married, Filing Separately, May Be the Tax Year 2020 Strategy

If you are married, most likely you’ve always filed a joint tax return with your spouse.

Most of the time, a joint return shows less overall tax than two separate tax returns do, because the married-filing-separately status has many tax disadvantages.

Fast-forward to the 2020 tax filing season, however—and nothing is as it was.

This year, four tax provisions will be key to determining whether you’ll be better off filing a joint tax return or separate tax returns for tax year 2020:

• Tax-free unemployment
• Recovery rebate, round 1
• Recovery rebate, round 2
• Recovery rebate, round 3

Tax-Free Unemployment

The American Rescue Plan Act of 2021, which was signed into law on March 11, 2021, excludes from tax the first $10,200 of 2020 unemployment benefits paid to an individual with 2020 modified adjusted gross income (MAGI) of less than $150,000.

Recovery Rebate, Round 1

The recovery rebate, round 1, is a refundable tax credit on the 2020 tax return, equal to

• $1,200 ($2,400 on a joint return), plus
• $500 for each dependent under age 17.

Your credit decreases by 5 percent of the amount your adjusted gross income (AGI) exceeds

• $150,000 if married, filing a joint return;
• $112,500 if head of household; or
• $75,000 if single or if married, filing separately.

The IRS gave you an advance payment of this credit based on either your 2018 or 2019 AGI and dependents. And now the IRS looks at your 2020 tax return and does the following:

• Smiles on you if the tax credit based on your 2020 tax return exceeds the advance payment. What do we mean by “smiles on you”? You get the additional amount as a refundable tax credit.
• Smiles on you (again!) if your actual credit is less than the advance payment. You keep the money. You don’t have to pay back any excess received.

Recovery Rebate, Round 2

This is a refundable tax credit on the 2020 tax return, equal to

• $600 ($1,200 on a joint return), plus
• $600 for each dependent under age 17.

Your credit decreases by 5 percent of the amount your AGI exceeds

• $150,000 if married, filing jointly;
• $112,500 if head of household; or
• $75,000 if single or if married, filing separately.

The IRS gave you an advance payment of this credit based on your 2019 AGI and dependents. And now the IRS looks at your 2020 tax return and

• Smiles on you if the tax credit based on your 2020 tax return exceeds the advance payment. What do we mean by smiles on you? Once again, you get the additional amount as a refundable tax credit.
• Smiles on you (again!) if your actual credit is less than the advance payment. You keep the money. You don’t have to pay back any excess received.

Recovery Rebate, Round 3

This is a refundable tax credit on the 2021 tax return, equal to

• $1,400 ($2,800 on a joint return), plus
• $1,400 for each dependent, regardless of age.

Your credit phases out over the following AGI ranges:

• $150,000 to $160,000 if married, filing jointly;
• $112,500 to $120,000 if head of household; or
• $75,000 to $80,000 if single or if married, filing separately.

The IRS will give you an advance payment of this credit based on your 2019 or 2020 AGI and dependents. If your first advance payment used your 2019 return information, then the IRS will send an additional payment based on your 2020 tax return if the IRS processes your 2020 tax return by August 15, 2021.

You then reconcile your advance payment(s) on your 2021 tax return:

• If your actual credit amount exceeds the advance payment, you get the difference as a refundable credit.
• If your actual credit is less than the advance payment, you keep what you have. You don’t have to pay back the excess benefit.

Why Separate Returns Could Be Better

There are two main reasons you may have net lower federal tax with separate returns versus a joint return.

First, if your MAGI is $150,000 or more on a joint return, but the spouse who received the unemployment compensation earns under $150,000 on a separate return, then that spouse can take the full exclusion up to $10,200 (except possibly in a community property state).

Second, if one spouse has AGI of $75,000 or less, but your joint AGI is over $150,000, then that spouse can claim the dependents and get all the available round 1 and round 2 credits on the 2020 tax return as well as the entire round 3 advance payment.

When considering the above, keep two important notes in mind:

1. For a couple that got joint advance payment(s), the law says you allocate 50 percent of the payment to each spouse. The higher-earning spouse doesn’t pay back any of his or her allocated advance payment, while the lower-income spouse will get the difference as a refundable tax credit.
2. Married taxpayers who agree how to allocate dependents on separate returns do not have to use the “tiebreaker” rules and can choose who claims which dependents. 

Important note. You may lose other deductions and credits on a separate return. The only way to know which is better in light of these temporary provisions is to run your tax returns both ways and see which puts you ahead. For example, separate returns can change your health insurance premium tax credit and perhaps some non-tax items such as your Medicare premiums.

As you can see there’s much to consider. If you would like us to check this out for you, please