Married Couples May Save Thousands By Filing Form 1040 Separately For 2021

The pressure on married couples to file joint returns is so strong that I am considering an addition to Reilly’s Laws of Tax Planning – Joint filing is an election. It is not one of your marital vows. It has generally been a harmless delusion for the happily or at least not utterly miserably married. Two single returns might cost less tax than a joint return – Reason number 435 to not get married -, but two married filing separately returns will almost never yield a lower total tax than a joint return until recently that is.  Apparently with 2021 returns it is happening a lot.

#TaxTwitter Is My Favorite #

I picked up on this from #TaxTwitter. Adrienne Gonzalez of Going Concern in January noted that #TaxTwitter is full of tax pros being mad as hell and not going to take it anymore from their clients.  But that is not all that is going on there.  Here is something recent from Adam Markowitz

I gave up on any thought of things making sense in early eighties – Reilly’s First Law of Tax Planning – It is what it is.  Deal with it. What I see here is opportunity.  I reached out to #TaxTwitter for examples.  Remember they are busy people going through a particularly grueling tax season.  So I was pleased to get a response from Lindsay Starrett, CPS, CCIFP of Baker Starrett in St. Grinnel IA.

Spouse 1 makes $160k, spouse 2 makes $65k. Three kids < 18, did not receive EIP3 for the family because 2021 filings were joint and over the filing limits. Did receive some ACTC. By filing MFS for 2021, I was able to have spouse 2 claim kids and EIP for themselves and each kiddo. They also received higher CTC on the return than they would have jointly. Spouse 1 did have income that was taxed at slightly higher brackets than would have been jointly, and did have to repay their half of ACTC with the return. Spouse 1 pays in with return, spouse 2 claimed refund. My tax savings on this particular client was about $7k – originally they owed $3.5k, and in the end will have overall refunds of about $3.5k. One thing they did lose out on was a bit of dependent care credit – in my scenario it was minimal. For parents of older kids, they may lose out on American Opportunity Credit by MFS, which might tip the scales to file jointly.

My life partner has a freebie family and friends practice.  We just spent some time on one of her returns and were unable to come to a conclusion before we both lost out patience.  It was, however quite clear that we could boost the child credit by having them file separately.  So I will try to explain that part to you as well as I can.

Credits For Qualifying Children And Other Dependents

Taxpayers with dependent children compute credits on Form 8812.  Here are the instructions. Maybe you want to follow along. Don’t forget Reilly’s Seventh Law of Tax Planning – Read the instructions. Many parents will have received a portion of the credit up front.  Information on that will be in Letter 6419.  Generally the amount that you received will be based on your 2020 or 2019 return.  If the return was joint the amount will be split between the couple evenly. You may have to pay some or all of it back, if things are different in 2021.

Form 8812 has forty lines, but you can get a picture of how this works by studying the “Line 5 Worksheet’ in which will yield the credit for a couple with less than $400,000 in adjusted gross income filing jointly who do not have any dependents other than children under 18.

Consider Robin and Terry who have  two kids Ryan and Reilly.  Robin has a salary of $180,000 and Terry has a salary of $40,000.  Other income is negligible.  Ryan and Reilly are 2 and 4, respectively.  Two kids under 6 yields us a credit of 7,200.  If we are filing jointly we have to do some math.  According to the handy calculator that Turbotax provides for free, the phaseout carves the credit back to $4,000.

If we file separately and give the kids to Terry, there is no carve-back.  So considering just that credit there is a $3,200 advantage to filing separately.

So Should They File Separately ?

Here I must refer you to Reilly’s Sixth Law of Tax Planning – Don’t do the math in your head.  There are a host of thresholds and phase-outs tied to Adjusted Gross Income (AGI) that may be affected by separate filing.  There are also explicit disincentives to separate filing including denial of dependent care credits or exclusion.

There are also things that might not pop into your mind quickly – like one half of the couple having capital gains and the other capital losses or one having passive income and the other passive losses. And at the most basic level there is the tax rate table which has narrower brackets for separate filers.

I have spoken with a few practitioners who have found, when they looked at this that the negatives of separate filing swamp the credit savings.  There is also a concern about getting paid for the extra work.  It is clear that there is something worth looking at here.  Unfortunately, retired as I am from active practice, I don’t have the right software to study the problem efficiently. The magic number seems to be a couple with adjusted gross income over $150,000 for both the child credit and possibly picking up economic impact payments.

What Should You Do?

If you might be a candidate for this, the smart thing to do is to have your return extended.  Anybody with the competence and equipment to deal with this thoroughly is swamped right now (April 5, 2022). That’s relatively easy.

What is hard is if you have already filed jointly and there would have been a substantial saving from filing separately.  You can decided what substantial is.  I have a rule with my kids that they can’t use the word “only” in connection with any sum of money greater than four dollars, but that is probably not a practical standard.

People who filed separately have loads of time to switch to joint.  Different story the other way around.  Here is what the regulations say:

For any taxable year with respect to which a joint return has been filed, separate returns shall not be made by the spouses after the time for filing the return of either has expired. 

April 15 is a holiday in 2022 in DC.  Emancipation Day is one of my favorites. So the due date is April 18.  As it happens April 15 is also Passover this year and April 17 is Easter.  Rumor has it many tax pros plan on not working that weekend, although you can’t rule out that they are kidding themselves. Nonetheless, I doubt they want to be doing amended returns for you then.

On the other hand if you prepare your own return, you should be able to figure it out in an hour or two depending how good your software is.

Other Coverage

WTOP News had a story Married Couples: Is It Better to File Taxes Jointly or Separately? citing US News & World Report in January that discussed the issue.

“I have never filed as many married filing separately returns as I did last year, and I expect that tax year 2021 may be similar,” says Morris Armstrong, an enrolled agent in Cheshire, Connecticut, who is authorized to represent taxpayers in front of the IRS. “It really involves getting the most bang for the stimulus payments and advance child tax credit.” He runs the numbers both ways for clients to analyze whether filing jointly or separately is better for them, especially for couples with children and one spouse who earns a lot more than the other.

I spoke with Mr. Armstrong and asked him how it has been going.  He has not seen as many separate filers as he did with the 2020 returns, but there have been quite a few.  The biggest spread he saw from making the move was around $4,000.  I asked him if he thought most other practitioners were paying attention to it.  He told me that he was pretty sure Connecticut enrolled agents were staying on top of the issue. As I’ve written in the past I think Enrolled Agents don’t get enough respect.

There Is More

I have been getting a lot of input from practitioners and plan on posting a follow-up to this piece.

Originally published on Forbes.com.

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

You can register on-line or reach them by phone (561) 268 – 2269 or email vc@bostontaxinstitute.com.  Mention Your Tax Matters Partner if you contact them.