MFS

[Christian]

I rarely check the MFS return status primarily because I hardly if ever found it benefited a couple. One of my clients thought that because he reinvested the proceeds of amounts he withdrew from some qualified accounts (IRA & 401-K) into Bitcoins he owed no tax on them. He did not bother to call me to ascertain if his understanding was correct and plumped down some $90,000 plus into his Bitcoin account. The fiduciaries of the accounts evidently got him to withhold some tax but he fell short of the mark. I ran the MFS ATX checker and it does indeed show a tax saving. My question is do I need to reconstruct two separate returns from scratch or is there a toggle in ATX that will transpose the respective information onto two separate returns ?  

[Margaret CPA in OH]

No automatic magic.  I duplicate the return, label as Filer, delete spouse info, change whatever is needed (anything marked as J, for example), then do the same for a duplicate return for spouse.  I always print first the form MFJ vs MFS to confirm all data is where it belongs and the bottom line is correct.  Be sure to note those items which are limited or no allowed for FS, only for joint.  It takes a bit of time but less than entering everything from scratch.  It does go quicker if you have correctly entered anything that was just F or just S and remember to split those J items, if appropriate.  I have done many of these and am grateful for this feature.

[Christian]

Thanks Margaret this will greatly facilitate my work. Much appreciated and lucky me the spouse has only her W-2 the rest is his.

[jklcpa]

Christian, you didn't say how old these clients are or if either are collecting social security, so remember that if they are receiving benefits and choose MFS status, that the base starting point to determine the taxable SSA drops from $32K (for MFJ) to $-0- (for MFS) for couples that live together.

I haven't used ATX in enough years that I don't remember now if that requires checking a box or if that is the assumed default for MFS with SSA benefits.

[Margaret CPA in OH]

1 hour ago, Christian said:

Thanks Margaret this will greatly facilitate my work. Much appreciated and lucky me the spouse has only her W-2 the rest is his.

Remember to change Filer and Spouse appropriately (correct SSN's, birthdates, etc.) and be sure to run the check return.  It likely will turn up a few reminders to check.  At least the bottom line should be easy to determine.

[Christian]

No social security as both are too young. After I complete the two separate returns I will do my DUE DILIGENCE that moniker the IRS so dearly loves and simply see if the combined tax due on both returns is less than the amount due on the already completed married filing joint return which I had ready to return to the couple. Hubby is delighted that wifey will have to pay her share as he usually gets stuck with any balance due.  What was that old song "She got the gold mine I got the shaft".

[Margaret CPA in OH]

The MFJ vs MFS form shows immediately the difference in tax liability, joint vs separate.  For Ohio, it also shows the difference for the state and for the combined liabilities.  Because OH begins with AGI and limits deductions and has other differences, it is possible to owe IRS but receive much larger, offsetting refunds from the state.  Your situation may vary considerably.  Just be sure to note the liability difference, not whether tax is owed or refunded.  That depends on how much tax was withheld, of course. 

To date, even with 'warring' couples, none have chosen to pay more tax overall just because the withholdings were not aligned.  A fairly recently married couple, older, was very surprised at the significant difference it made as a household liability.  Neither had been previously married and wanted to keep everything separate until it would have cost them, combined, over $1000.

[Lion EA]

So many opportunities to save our clients money lately with unemployment exclusions, refundable credits, etc.

[Christian]

Well Margaret it did not work. Although his tax dropped hers increased by a greater amount and their federal tax was more under MFS. He will just have to pony up. Interestingly the wife's W-2 income when taxed as a single person or as married filing separate shows a significant federal under withholding and is her only income in their situation. They have a farm loss which evidently mitigates this I guess.

[Yardley CPA]

On 8/20/2022 at 8:09 PM, Christian said:

Well Margaret it did not work. Although his tax dropped hers increased by a greater amount and their federal tax was more under MFS. He will just have to pony up. Interestingly the wife's W-2 income when taxed as a single person or as married filing separate shows a significant federal under withholding and is her only income in their situation. They have a farm loss which evidently mitigates this I guess.

Glad that it ended up showing that MFS didn't result in savings because I don't believe you can amend a MFJ to MFS after the due date of the original return.  

[Lion EA]

Yardley: I think the OP is filing an original return and not amending.

Christian: Here's a good article from the U of Illinois Tax School helpful for original returns as well as amended; it contains a couple links to additional materials...

https://taxschool.illinois.edu/post/a-narrow-window-for-married-couples-to-enhance-tax-credits/

[Christian]

The husband here decided to make a huge bet on Bitcoin "My source advises me it will hit $100,000 by the end of the year". With such a huge amount of money dropped into the couple's income stream he failed to remember that our system is progressive and he went into a higher bracket. He never bothered to call me to discuss what might happen by taking this action but in truth people rarely do so now he is going to pay a not inconsiderable tax bill.

[Lion EA]

With a $100,000 jump in income the higher MFS rates wiped out any potential savings that MFS might've saved due to credits the wife can claim with her lower income. But you don't know until you try. Did you look for any J deductions that were paid with J funds that could be allocated to the H if it lowers his taxable income/lowers the tax liability for the family as a whole? 

[Christian]

This is wife number three. They both have wages of about $75,000 each and contribute big chunks of their incomes to 401-K plans. There is no joint income. They likely thought this would offset any additional tax but he also has a great income stream from dividend income which he recently got from his deceased mother along with money from a rental. It's a simple case of no tax planning and might prove a lesson for him. His Bitcoin remember that of the $100,000 dollar value? It is now at about $21,000 a coin not $100,000. He is not exactly doing an Irish jig over that either.    

[Lion EA]

Do they own a house jointly? Or live in a house together and pay RE taxes and mortgage interest from joint funds? Anything at all that can be shifted to whichever needs it the most? Otherwise, book a tax planning consultation and charge for it !!

[Margaret CPA in OH]

13 hours ago, Lion EA said:

Do they own a house jointly? Or live in a house together and pay RE taxes and mortgage interest from joint funds? Anything at all that can be shifted to whichever needs it the most? Otherwise, book a tax planning consultation and charge for it !!

Just keep in mind that, if filing separately, both must either take the standard deduction or both must itemize.  With the high standard deduction now, itemizing even splitting, can be less advantageous than in earlier years.  So take a look also at state and local taxes - more than $10,000? - and charitable deductions.