More MFS Returns?

[Edsel]

With the benefit of itemizing deductions gone for most taxpayers, will there be more MFS returns?  Particularly for spouses of equal income.

Are the rates still prohibitive for doing this, or they halved as they were last year?  Out of 200 returns, in the past I have only justified 1 or 2 separate returns in the course of a year.

[Pacun]

Yes, spouses with equal income will continue to file MFS when the other spouse is only reporting half of his income. Or when the refund of a MFJ return would be withheld to cover child support.

[jklcpa]

Under the TCJA, the MFS brackets are exactly half of the MJF, and Pacun gave a good example of when MFS may be of benefit.  With that being said, we must still consider factors such as the composition of income and anything on the returns that may be affected by AGI or taxable income limits, and possibly run scenarios using each filing status because there are still items that aren't treated the same under the two filing statuses.

A couple of examples I can think of off the top of my head:

• MFS may result in more of the social security benefits that are taxable if the couple lives together
• anyone wanting to contribute to an IRA for a nonworking spouse under the spousal IRA rules must file MFJ
• and I have some wealthy older couples with huge investment portfolios, yet the returns are fairly straightforward with only SSA benefits and investment earnings for income. I've prep'd returns for them where one of the spouses will make a huge charitable gift annuity that would have definitely exceeded 50% of AGI if they'd filed MFS and ended up with a carryover. In fact one year, the gift exceeded 50% of AGI on a MFJ basis so they still ended up with a carryover.

[SaraEA]

There are several lucrative adjustments and tax credits that are not available to MFS, e.g., EITC, AOC and Lifetime Learning Credits, child and dependent care credit, student loan interest.  You really have to run the returns both ways to be sure.

[Abby Normal]

13 hours ago, SaraEA said:

There are several lucrative adjustments and tax credits that are not available to MFS, e.g., EITC, AOC and Lifetime Learning Credits, child and dependent care credit, student loan interest.  You really have to run the returns both ways to be sure.

Exactly. I know they did this to prevent dishonest people from abusing the tax laws, but this ends up hurting people who are divorcing but can't file jointly, or as HOH or single.

[SaraEA]

Most of my clients who are divorcing have court orders to file jointly.  I've even had some who have court orders to file jointly even when the divorce is final by the end of the year!  Love to have to explain to them that federal law trumps civil.

[Edsel]

On 8/19/2018 at 11:30 AM, jklcpa said:

• one of the spouses will make a huge charitable gift annuity that would have definitely exceeded

Speaking of IRAs and charitable gifts: 

If a charitable gift is directed to be paid from an IRA, does the amount reduce a RMD?

Example:  Mortimer's RMD for 2018 is $2500.  He directs the IRA to pay $2500 to the Cleveland Symphony as a charitable gift.  Is he required to take any more distribution in 2018?

With so many people unable to itemize and receive any deduction for charity, the idea of directing IRA money to charity is an idea that is quickly catching on as a strategy to minimalize taxes.

Slightly changing the topic, but an important question nonetheless.

 

[jklcpa]

1 hour ago, Edsel said:

Speaking of IRAs and charitable gifts: 

If a charitable gift is directed to be paid from an IRA, does the amount reduce a RMD?

Example:  Mortimer's RMD for 2018 is $2500.  He directs the IRA to pay $2500 to the Cleveland Symphony as a charitable gift.  Is he required to take any more distribution in 2018?

With so many people unable to itemize and receive any deduction for charity, the idea of directing IRA money to charity is an idea that is quickly catching on as a strategy to minimalize taxes.

Slightly changing the topic, but an important question nonetheless.

 

Yes, the Qualified Charitable Distributions (QCD) count toward the RMD, and the QCD also reduces the taxable portion of the distribution too.  Up to $100K is allowed, and the person must have reached age 70.5 also.

[Abby Normal]

You have be careful that the client doesn't include the contribution as a deduction and end up double dipping.

[JohnH]

Also, the QCD must be done AFTER the person reaches 70.5.  Simply making it in the year the person reached 70.5 would meet the RMD requirement, but to qualify as a QCD it must be done after the birthdate. 

[Terry D EA]

On ‎8‎/‎20‎/‎2018 at 9:39 PM, SaraEA said:

Most of my clients who are divorcing have court orders to file jointly.  I've even had some who have court orders to file jointly even when the divorce is final by the end of the year!  Love to have to explain to them that federal law trumps civil.

Yep exactly. Know a couple where the guy purposely failed to report income so he didn't have to pay. Filed the MFJ return without the spouse's knowledge or signature. During the divorce the court ordered each to share the tax burden. This was CA and the guy's lawyer dug up all this crap in court regarding community income, community expense; etc. I worked with the spouse in this case. Without getting into lengthy details, we filed equitable relief with the IRS with all the claims of fraudulent signatures; etc. Took a while but, the IRS ruled the spouse does not have to repay any of the tax bill. The guy had 90 days to appeal the decision. He appealed and the IRS still ruled in her favor. I loved it.