Married filing separate with children

[Bucky]

Married couple living together andt MFS saves them money. They have three children. If i give one spouse all three exemptions it increases benefit by over $1000. I can't find anything that says you must split up the children etc. The parents incomes are close but the three on one creates the additional child credit hence the extra savings.

[MRPLOW]

This is and has been a valid technique for decades. You may want to go back and look at previous returns you have filed and look for amendment opportunities. How long have you been preparing tax returns?

[AZUKHiker]

This is going to be a common technique this year to maximize and get extra Recovery Rebate Credit for married couples.

[Bucky]

I am in Ohio and we do a lot of married filing separate because of the savings from Ohio tax if incomes are close. Never had one concerning additional child credit savings on the federal. Thanks

[BP.]

This is going to be a common technique this year to maximize and get extra Recovery Rebate Credit for married couples.

Are you saying that MFJ with kids would file 2020 MFS, each reporting 50% of the EIPs received, then get 50% additional for the kids as Recovery Rebate Credit? Barring other downfalls of filing MFS, that is.

[Lion]

It works best if the couple earned over $150,000 so received no EIP as MFJ. If one of them earns less than $75,000 and they file MFS, then the lower income spouse will get RRC1 and RRC2, an extra $1,800. If that person also claims three kids, like the OP, then another $1,100 per kid. Total $5,100. The family will be taxed at the MFS rate and pay for two sets of returns. Run the numbers to see which filing status gives the best benefit to the family.

[AZUKHiker]

Are you saying that MFJ with kids would file 2020 MFS, each reporting 50% of the EIPs received, then get 50% additional for the kids as Recovery Rebate Credit? Barring other downfalls of filing MFS, that is.

Yes. There is nothing in the CARES Act or subsequent legislation that appears to prevent this. Some tax preparers are questioning whether that is what Congress intended and whether it is ethical to offer this option to clients.

My view is that it is not our job to police the intention of Congress. If something is legal we should offer it to clients.

In a Community Property state like mine I will attach the major caveat that any refunds will be significantly delayed as the IRS is hopeless at processing MFS returns from Community Property states.

[BP.]

Yes.

Thanks for replying. So this technique could give a "half-double dip" to families who know they already got the FULL EIP 1 & EIP 2?

Can this even be presented to taxpayers without some of them wondering if they (and their preparer) are pulling a trick?

It doesn't seem quite the same as using filing status to maximize RRCs for partial or no EIPs. Or for maximizing CTC/ACTC. But is this how this will be handled by preparers?

(Sorry to hijack this ACTC thread.)

[Lee Welter]

Sloppy legislation causes problems. It may seem immoral, but it is not unethical or illegal. Our job is to follow the law. The Govt also sent checks to deceased individuals or their estates. No requirement to repay. I would suggest checking the box for the MFS comparison and paying close attention to it.

[sami]

So we preparers can do this, meaning married filing separate if the client was above the threshold to claim the stimulus. Can someone please explain if it really is ethical or will it come back and cause more trouble.

[Lion]

BP: No. A family won't get any benefit if they already got the full EIP1 and EIP2. But, if they were partially or totally phased out of any EIP, and one spouse makes less than $75,000, then that spouse can get the RRC for her/himself and any children she/he claims. Do the math. You should always be comparing MFJ to MFS, but this year pay very close attention. Small RRC benefits will be wiped out by the more expensive MFS tax rates and fees for two sets of returns, but add in two or more kids...

[BP.]

A family won't get any benefit if they already got the full EIP1 and EIP2.

Where's the mechanism that prevents this, if shifting from MFJ to MFS?

This is about full original EIP 1 & 2 funding, not the cases of partial or no funding. Certainly leverage filing status to get remaining dollars from partial EIPs. That's a separate scenario.

Post #3 implied to me this, for example: MFJ each with a $45,000 W-2 and one qualifying child. The family got full EIP 1&2 - $2,900 plus $1,800.

If MFS for 2020, their overall tax is the same under MFS or MFJ. Each spouse reports one half of the total EIPs received, or $2,350 each.

The spouse claiming the QC, as figured on their RRC worksheet, gets $550- to quote post #3 "extra Recovery Rebate credit." The spouse without the QC keeps the $550 from the original EIPs.

So if the view is that there's no additional benefit available to this family, then where do you see the stopgap? Thanks for your thoughts.

[Lion]

By the time they pay the MFS tax rates (my clientele is generally over the phaseout range and received little or none, so I have not run the numbers for your scenario where they already received full EIP1 and EIP2) and pay me for two sets of tax returns/calculation fees, they will need more than $550 to be in the black.

I just did the calculations for a potential new client, a woman who's divorcing and wanted to look at MFS. Her husband is NOT my client, but she brought their MFJ 2019 return and knew they received just over $900 for EIP1. Sure enough, together they were over $150,000 but with two young children, not yet completely phased out for EIP1 but $0 for EIP2. If all stayed the same for 2020 (she had her W-2s and knew hubby didn't get a raise until end-November, so 2020 looks very, very close to 2019) the couple does over $1,000 WORSE with MFS -- even before my calculation fee and tax prep fee(s). However, ONLY the wife is my client, and she continues to earn less than $75,000, so her MFS return will have a refund of $7,200. But to your point, MFS does NOT benefit this household as a whole; with their fact pattern the household does over $1,000 worse MFS than MFJ before my fees. Facts & circumstances.

[AZUKHiker]

By the time they pay the MFS tax rates (my clientele is generally over the phaseout range and received little or none, so I have not run the numbers for your scenario where they already received full EIP1 and EIP2) and pay me for two sets of tax returns/calculation fees, they will need more than $550 to be in the black.

I just did the calculations for a potential new client, a woman who's divorcing and wanted to look at MFS. Her husband is NOT my client, but she brought their MFJ 2019 return and knew they received just over $900 for EIP1. Sure enough, together they were over $150,000 but with two young children, not yet completely phased out for EIP1 but $0 for EIP2. If all stayed the same for 2020 (she had her W-2s and knew hubby didn't get a raise until end-November, so 2020 looks very, very close to 2019) the couple does over $1,000 WORSE with MFS -- even before my calculation fee and tax prep fee(s). However, ONLY the wife is my client, and she continues to earn less than $75,000, so her MFS return will have a refund of $7,200. But to your point, MFS does NOT benefit this household as a whole; with their fact pattern the household does over $1,000 worse MFS than MFJ before my fees. Facts & circumstances.

Don't forget those of us that live in Community Property states get a 50:50 split of the income so absent other tax issues the income tax is the same if MFS or MFJ. Hence it is quite possible to get at least $1K more RRC by filing MFS with 2 children. Depending on what else is being claimed on the tax return it is quite possible that $1K may be offset by lost credits etc etc if MFS so the numbers need to be run both ways.

I've already offered this to one client and they declined. In Community Property states filing MFS often leads to a significant delay in the refund which is likely to be worse this year due to the ongoing Covid delays at the IRS. This client just didn't want the hassle even if they could get $1K more.

[AZUKHiker]

Just looked at the Ways and Means mark up of the next stimulus bill. In s9601(h)(2) they have made it very clear they want the IRS to issue regs or guidance to make sure there is only one credit payment per individual for the 2021 RRC. Although very early days with this bill maybe something I will bear in mind even for the 2020 RRC and add as an additional caveat when advising clients on doing the MFS for 2020 returns. The section in the CARES Act for 2020 RRC giving the IRS authority to issues regs and guidance is far less explicit than this new clause but gives a clue that Congress has got wise to what is going on.