MFS and Dependent Care Benefits

[S T]

Not sure how to handle this - a first for me!

Have a taxpayer that is usually MFJ that wants to file MFS for year 2016. They are not legally separated and still live together, it is a tax liability issue

Has a dependent child which is being claimed by Wife, higher wage earner.

Husband has a W-2 Box 10 - dependent care benefits for $ 5,000 - have an error message software that says Child Care Credit Not Allowed, and adding the DCB of $ 5,000 to taxable wages on line 7
Reading TTB and Form 2441 Instructions, Seems there is NO relief on the Dependent Care Benefits through payroll and that the amount is then added back on line 7 wages.

Am I missing something?

Thanks

Sandy

[FEDUKE404]

Not sure how to handle this - a first for me!

Have a taxpayer that is usually MFJ that wants to file MFS for year 2016. They are not legally separated and still live together, it is a tax liability issue

Has a dependent child which is being claimed by Wife, higher wage earner.

Husband has a W-2 Box 10 - dependent care benefits for $ 5,000 - have an error message software that says Child Care Credit Not Allowed, and adding the DCB of $ 5,000 to taxable wages on line 7
Reading TTB and Form 2441 Instructions, Seems there is NO relief on the Dependent Care Benefits through payroll and that the amount is then added back on line 7 wages.

Am I missing something?

Thanks

Sandy

Married Persons Filing Separately

Generally, married persons must file a joint return to claim the credit. If your filing status is married filing separately and all of the following apply, you are considered unmarried for purposes of claiming the credit on Form 2441.

You lived apart from your spouse during the last 6 months of 2016.

Your home was the qualifying person's main home for more than half of 2016.

You paid more than half of the cost of keeping up that home for 2016.

If you meet all the requirements to be treated as unmarried and meet items 2 through 5 listed earlier, you can take the credit or the exclusion. If you don't meet all the requirements to be treated as unmarried, you can't take the credit.

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Basically, the husband has no allowable dependent care benefits so the amount shown in Box 10 of his W2 is taxable and gets added to his line 7 wages, with "DCB" added on the same line.

FE

[Roland Slugg]

Have a taxpayer that [] wants to file MFS for year 2016. It is a tax liability issue.

Which means, apparently, that the happy couple wants to pay more taxes than they have to.

The H doesn't qualify to be treated as if he were single, because he lived with his wife. Since the child spent an equal number of nights with each parent ... all 366 nights ... the child can only be his "qualified person" if he is the parent with the higher income. Since he is not, the DCB are taxable to him, and he isn't entitled to any DC credit.

Can't help but wonder where the parents got the idea that MFS was a good idea. Hair stylist? Auto mechanic? Gardener?

[S T]

Thanks for my confirmation on the reading on DCB!

I suspect the "Happy" Couple will probably be no longer! Wife seems responsible, husband not so much. He keeps playing with his withholdings and going exempt as well as prior IRS account issues. Therefore the wife's decision to file MFS.

Sandy

[FEDUKE404]

Addendum

Although it's not completely clear from the facts of the original post, there is a distinct possibility that **NEITHER** spouse can claim dependent care expenses if they decide to go with "married filing separately."

Soon-not-to-be wife loses the tax credit, and soon-not-to-be-husband does the same plus pays income tax on the $5k he tossed into (unused) dependent care benefits.

While the usual "nights in house" and "custodial parent" issues are always relevant, your tax software should have some further questions for you to address. Something like "check this box if the husband did not live with wife for any time during the year / last six months" or similar. Sometimes a still-married person can go with filing MFS when neither single nor HOH is applicable. The phrase "abandoned spouse rule" rattles around, although that is obviously not applicable in this situation.

Maybe the happy couple can reach a MFJ compromise? Of course, if they do so and file a Form 2441 (required even when a dependent care account is active) the tax credit per se may well shrink/disappear, but at least the husband would make the extra income vanish from line 7.

You also need to factor in what potential tax increase might occur with any involved state income tax. In the original scenario, the husband would more than likely be exposed to state income tax on an additional $5k of income also.

Otherwise, the couple might want to schedule another tax consult with their barber / hair stylist.

FE

[Rapid Robert]

Why does everyone keep replying about the "married living separately" issue when it was clear from the start this does not apply?

Too bad taxpayers are not in a community property state like CA (or are they?), if so half the Box 10 amount could be allocated to the other spouse.

At least he got out of paying SS/Medicare tax on the $5K amount.