Almost every time I have a new client who either just got married or is going through a divorce, the subject of a married couple filing two separate returns comes up.
So let’s get some information about this subject.
First, Nevada is considered a “community property state.” What that means is, by law, unless otherwise defined (by a pre-nuptial agreement or by a separate trust), everything is considered to be joint and shared equally. Where that really gets painful is in a divorce. The story goes about Robin Williams, he once was worth $80 million. He found the supposed “love of his life” and got married. A couple of years later, he discovered she was not the love of his life. Since he lived in a community property state (California), half of his $80 million went to the ex-spouse. Now, he only had $40 million. He found a new “love of his life” and got married. Shortly after that, he divorced the 2nd wife, who, by virtue of the community property laws in California, got half of his $40 million. Now, poor Robin, two lost loves later, had lost $60 million!!! He went on to make the mistake again. (Robin was not a quick learner in the subject of love.) He should have put his remaining wealth in a trust or got a pre-nuptial agreement, but no, he was sure #3 was “the one.” Turns out, she wasn’t, and she got $10 million. Hopefully, this demonstrates the basic downside of living in a community property state. (Most states west of the Mississippi river are, by the way.)
The IRS, not to be left out, created special rules for filing separate returns in community property states. Unlike separate property states (most of the first states derived their basis in law from England), community property states (which derive their basis in law from Spain), everything, regardless of who bot it, inherited it, received it by gift, earned it, etc., is split down the middle. Half the related income on one spouse’s return and half on the other. Same goes for federal income tax withheld, and all deductions, credits, etc.
To put it simply, filing married filing separate returns is just preparing a married filing joint return and then splitting it down the middle, 50/50.
To make it worse, the tax rate tables are basically the same as single. Thus, on average, when filing married filing separate, you will pay much more tax than if you file married filing joint. Ouch!
Now, IRS is not cold-hearted. They understand that some divorces are so contentious that the parties are unwilling to share information, making it impossible to compute a proper return, either way. Thus, in such a situation, you are best to file your married filing separate return, with only your information, then to not file at all.
Have you heard? Prov 21:9 says, “Better to dwell in a corner of a housetop, than in a house shared with a contentious woman.” (Same goes for a contentious man.)