Oregon Tax Consultants Practice Exam

Which of the following is a consequence of filing MFS?

1. Eligibility for additional tax credits

2. Higher tax rates and limitations on various tax benefits

3. Automatic exemption from tax audits

4. Increased deductibility of personal expenses

The correct answer is: Higher tax rates and limitations on various tax benefits

Filing as Married Filing Separately (MFS) can lead to higher tax rates compared to filing jointly, as tax brackets tend to be less favorable for MFS filers. This filing status often eliminates or limits access to various tax benefits, such as certain credits and deductions that are typically available to those who file jointly. For example, the Child Tax Credit and education-related tax credits may be reduced or completely unavailable. By choosing to file MFS, couples may also face restrictions on deductions that are subject to income phase-outs. This can create a situation where the overall tax liability is higher when compared to filing jointly, making this consequence particularly significant for tax planning purposes. Thus, the implications of selecting the MFS status should be carefully considered, especially for couples who might otherwise benefit from filing jointly.