Filing Separately For 2021 Tax Savings Who Is Missing Out?

I recently wrote about the phenomenon of married taxpayers filing separately in order to avoid phaseout of recovery rebate and child credits.  I picked up on the story by following #TaxTwitter, where tax pros go to commiserate. My sources on the tax press have confirmed my impression that this story has not garnered much coverage beyond the twitter action. Most disturbing was an unscientific survey I did.

I will say that there are some pretty complicated computations.  Complicated enough that I am not going to try to explain them in detail.  But it is not rocket surgery and the reports I have gotten indicate that most software will split returns, although there will probably be some sort of futzing required beyond pushing a button.

Who Is This For ?

Robin and Terry have four kids Reilly, Ryan and Blynn.  Blynn, the oldest will turn 6 in 2022.  Robin has a salary of $160,000 and Terry makes $70,000.  Between shift work and help from parents their child care expenses are negligible.  They don’t live in a community property state.   By filing separately and giving all the dependents to Terry they will increase their aggregate credits by more than $10,000.

Is that enough to make up for the host of disadvantages of filing separately?  Brent Lipschultz of Eisner Advisory Group gave me an eloquent summary of the hurdles:

Where the tax code may “giveth a certain benefit” to filing separately, so to it can “taketh away” . For instance, the earned income tax credit, the educational tax credits, the child and dependent care tax credit, and the student loan interest are not available to those filing separately.

By filing separately you are at the whim of your spouse if he or she takes the itemized deduction, you will have to itemize, which potentially forfeits a 12,550 deduction, if you have nothing to itemize. Separate filers contribute less to their IRAs and deduct only 1,500 of capital losses versus 3,000 with a jointly filed return on capital transactions.

There could be a benefit of separately filing if one spouse with lower income incurs medical expenses that they would not otherwise be able to claim if their incomes were combined on a joint return.

Tax practitioners must sharpen their pencils, analyze all of the possible facts, and crunch the numbers, but you will find that the general rule of thumb of filing jointly holds true in most cases due to the rate table.

There is more.  One of you might have passive losses and the other have passive income.  And separate filing can cause an increase in Medicare Part B premiums.  That is generally not a concern for the parents of small children, but it is one more thing to watch out for.

This particular problem is one where Reilly’s Sixth Law of Tax Planning – Don’t do the math in your heard – comes into play.  The pencil that Mr. Lipschultz mentions is metaphorical.  What you need is good software to efficiently run multiple versions of the returns.

Why #TaxTwitter And Nowhere Else?

I spoke with Mike Sylvester of SBS CPA Group in Fort Wayne Ind. He came to the conclusion about the merits of separate filing for couples with the right mix of kids and income.  He estimates the median income of clients in his practice as being around $160,000. It seems that the sweet spot for the technique is just a little north of there. He figured it out and did a training in his firm that he then offered to others on #TaxTwitter as a way of confirming his results.  There were 28 people who took him up on it.

He heard from others who had noticed the phenomenon doing 2020 returns.  What he did confirm is that there are a lot of people who were not onto it. Mike gets the prize for the largest reported savings from going separate.

He told me that he has spoken with people working at the big commercial preparers and they don’t seem to be checking for it.  For what it is worth I reached out to H&R Block with the question and was told that they will get back to me when they are able.  Still waiting.

Take Your Time If You Have It

I’m going to go out on a limb and say that if you have kids and Adjusted Gross Income between $150,000 and $400,000, you really need to be looking at this.  To be honest I am very uncertain about the upper limit.  Just run the numbers.  If you haven’t filed yet (It is April 9 as I write this), get an extension, so you are not doing things in a rush.

If you have already filed a joint return, there is a problem.  You can amend to separate returns from a joint return only up till the original due date of the return,  Mike Sylvester felt lucky that he had figured it out early so he was able to look back at any that had already gone out.

Who Gets It ?

My impression is that the people who are onto this this are small but not micro local firms who serve moderately prosperous people for whom a couple of thousand dollars is pretty meaningful. Much as I want to be true to my school, I have to say you might have more luck with an Enrolled Agent than a CPA, although we have Mike Sylvester there making us shine.

Based on my survey of reddit, I doubt that people who do their own returns are on to this that much. If you insist on continued self-reliance, be very careful, because there are a lot of traps in separate filing.

If you are one of those fortunate souls who has your return done by a larger firm as an accommodation to your parents or your spouse’s parents, they might be missing this. I am totally agnostic on how well family offices will handle this.

Salute To #TaxTwitter

You know #TaxTwitter if our dysfunctional Congress, confusing Code and broken IRS continue for a thousand years, people may still say that this was your finest hour.

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Originally published on Forbes.com.

For great value continuing professional education.  I recommend the Boston Tax Institute

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