EIP: Possible benefit to file MFS ???

[TaxGuyBill]

Am I missing something?  MFS could be beneficial with EIP.

To keep it simple, I'm just going to give the example with the first EIP ($1200 per taxpayer, plus $500 per kid).

2019 Joint tax return with 4 kids.  Received $4400 for EIP/Advance credit.

2020 file MFS.  One parent claims all 4 kids.  The law (and as of now, the draft instructions) say 1/2 of EIP/Advance credit belongs to each spouse.

2020 first spouse, 4 kids.  Qualifies for $3200 credit.  Claims 1/2 of Advance credit ($2200).  Gets an extra $1000.

2020 second spouse, 0 kids.  Qualifies for $1200 credit.  Claims 1/2 of Advance credit ($2200).  Does not need to pay back advance credit.

Net result, an extra $1000.  Obviously there are often bad tax consequences for MFS, but it seems like this could make MFS beneficial in some cases.  Especially with both EIP credits.

Does that seem accurate to you guys?

PS : I hope I'm wrong.  I really don't want to deal with that this tax season.

[abctax55]

Arggggghhhh. 1.5 martinis on board; I'll try to check your logic tomorrow. But, like you, I almost don't want to know 🙂

[Terry53029]

If the four kids are under 17 CTC is $8000. MFS only $4000. As you said, lot of downside to filing MFS, especially with kids 

[itonewbie]

That's not how I'd read it.

Subparagraphs (e)(2) of §6428 and §6428A which deal with the reconciliation of recovery rebates credit for MFS taxpayers against advance refund previously received based on MFJ are identical.  Both state the following [emphasis added]:

JOINT RETURNS .—Except as otherwise provided by the Secretary, in the case of a refund or credit made or allowed under subsection (f) with respect to a joint return, half of such refund or credit shall be treated as having been made or allowed to each individual filing such return.

Paragraph (2) of subsection (f), in turn, refers to the advance refund amount being "the amount that would have been allowed as a credit under this section for such taxable year if this section (other than subsection (e) and this subsection) had applied to such [alternative] taxable year."

If we then look back at subsection (a), which provides for the amount of recovery rebates credit to which an eligible individual may be allowed, we'll see that the only reference to "joint return" is with respect to the $2,400/$1,200 MFJ taxpayers should receive (as oppose to $1,200/$600 for others).  Subparagraph (a)(2) is a separate clause that deals with credit allowable for each qualifying child without regard to filing status.

The logical result (although I could well be over-reading this) is that the MFS spouse claiming the relevant qualifying child(ren) on his/her return should account for the full advance refund amount(s) received with respect to the qualifying child(ren), rather than just 50%, regardless of whether he/she filed MFJ in the alternative taxable year.

I suppose they could have made it clearer with how the law is written and the Treasury Secretary could have promulgated regulations, as authorized under both Code sections, to clarify the application but he didn't.

I do notice, however, §6428A did make some improvements to bridge various gaps that existed in §6428, particularly in relation to mixed-status households, inmates, and payment to an account from which a taxpayer had made a tax payment on or after 1/1/2019 (for those who had not previously authorized direct deposit of refunds).

[TaxGuyBill]

Okay, I see what you are saying.  You are saying in (e)(2) the credit "with respect to a joint return" is only the $1200, rather than the entire credit (with kids) as I had originally interpreted it.  Hmmm.  

I completely agree that your method/reasoning is the logical, reasonable way.  But it's not exactly very clear wording in the Code, is it?

And as of now, the Draft Instructions seem to phrase it closer to my original interpretation, without comments about the kids:

• If your EIP 1 or EIP 2 was based
on a joint return, you and your spouse
are each treated as having received half
the payment that was issued.

As a side note, the worksheet in the Draft Instructions indicate the taxpayer can look up the amounts online:

https://www.irs.gov/payments/view-your-tax-account

[TaxGuyBill]

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@Terry53029 wrote:

If the four kids are under 17 CTC is $8000. MFS only $4000. As you said, lot of downside to filing MFS, especially with kids 

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???  Filing separately doesn't cut the Child Tax Credit in half does it?  Why would MFS be $4000?  Of course there are income limitations, but it still should be $2000 per child, shouldn't it?

[itonewbie]

I don't disagree with you.  The way the filing instructions are written, they do refer to the entire amount of EIP 1 and EIP 2, inclusive of amounts paid for qualifying children.  Hopefully, clearer guidance will be forthcoming.

[Terry53029]

@TaxGuyBill  your right bill I misspoke, as I meant the income levels are cut in half, and not the credit ☹️