MFS vs. MFJ

[Forensicacctnt]

I have two clients who for years have filed MFJ as the optimum filing status. However, for 2021 with the Advance Child Tax Credit, the automated report I always run when doing a return for couples, it shows for both clients that MFS is the better option. In the two page analysis of comparing the two status, it's the child tax credit being given more to one spouse than the other. I am not sure if the analytical report is correct? Has anyone encountered this situation for 2021? Thank you.

[Lion]

Many times with the various credits with AGI ceilings. Often MFS gives the couple a larger refund if one spouse then qualifies for a credit or a partial credit that as MFJ they earn too much for that credit. If the spouse with the lower income claims all the children, it very well may work out better for the couple. If your MFJ vs MFS report looks good, then split the returns. Then you can make a final decision on which filing status to recommend to your clients.

[New York Enrolled Agent]

As the legendary judge Learned Hand said “there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible”.

[Rapid Robert]

"I am not sure if the analytical report is correct?"

It is smart to not just accept the what-if report without question. In similar situations, I have found it helpful for analysis to actually go ahead and create the pro forma MFS returns ( your software should have an automatic feature for this) so you can dig into the details not shown on the MFS v MFJ report.

"with the Advance Child Tax Credit, ... it's the child tax credit being given more to one spouse than the other."

Sounds like possibly taking advantage of the repayment protection safe harbor for excess advance payments (ACTC). Presumably you are putting the kid(s) on the other spouse's return, or something like that? If your report were merely reflecting a lower AGI for one spouse, then wouldn't it have shown a similar result in prior years? The only thing that changed for 2021 was the ACTC, and the temporarily higher (refundable) credit amounts.

Also, wouldn't the EIP #3 / RRC have a similar increase, due to switching kids between returns?

Under normal circumstances there is rarely a benefit to filing MFS (except maybe for Ohio), but I recall reading many comments in various forums about how the system could be gamed to take advantage of this generous loophole by filing separately and/or switching who claims the dependents. I also assume you are not in a community property state, where the two MFS returns would generally show the same income amounts.

[Forensicacctnt]

Thank you for the responses; they are very helpful. In reviewing the analytical software report here is briefly the case. Using fictitious names for reference, the AGI for John is $30K and Mary $48K. One child, age 2. Taking the standard deduction is optimum. The parents each received $900 for the Advance Child Tax Credit. In analysis for MFS, by John claiming the child, the Additional Child Tax Credit is $2,700. So, the results are a refund to John of $2,324 and Mary owes $2,106; net is a refund of $218 versus if filing MFJ, tax owed of $1,265, a difference of $1,483. I am in N.C., it is not a community property state. In 2020, income and other information is similar except the child tax credit was $2,000 not $3,600. So MFJ was better only by $200.

[Forensicacctnt]

One additional comment for this client as I previously wrote about filing MFS, John receives a refund, but Mary has tax to pay. As with a similar client, Mary will get a letter from the IRS assessing penalty and interest on the tax since it was not paid by April 15 when I filed the six month extension. Then we will have to ask for abatement of the penalty but still pay interest. If that works, the tax savings, $1,483 is worth the trouble. Comments?

[Dude]

You also want to run the difference in state taxes. This is what makes Ohio MFS attractive.