There are several reasons why some married couples opt to file taxes as married filing separately. However, this tax filing status can prevent individuals from claiming certain types of tax credits and deductions they might otherwise be entitled to if they filed their taxes jointly. Here is some information to understand about this filing status and its impact on the child tax credit (CTC) and the child and dependent care tax credit (CDCTC) from the accounting professionals at TMD Accounting.
Why Would People Choose to File Taxes as Married Filing Separately?
When couples file tax returns as married filing separately, they can’t claim many credits to which they would otherwise be entitled. Before the passage of the Tax Cuts and Jobs Act (TCJA) in 2018, there was somewhat of a “penalty” for married couples who filed jointly because the standard deduction for joint filers was not twice that of single filers. However, the TCJA changed the tax brackets to make the standard deduction for joint filers double that of single filers, eliminating this so-called penalty.
Even though filing as married filing separately might make some people ineligible for certain tax credits, it might be advantageous for people in the following types of situations:
- When a spouse has unpaid student loan or tax debt to avoid a refund being seized to pay for it
- When one spouse believes the other is inflating deductions or otherwise being dishonest on their tax return and does not want to be liable by signing a joint return
- When one spouse is applying for income-contingent student loan repayment plans
- When one spouse’s income is substantially lower than the other spouse’s, and the lower-earning spouse does not want to be liable for the higher-earning spouse’s tax bill
- When one spouse is unwilling or unable to sign a joint tax return
- When the spouses are planning to separate or divorce
- When the taxes owed on the separate returns equal the taxes owed on a joint return to avoid liability for each other’s tax bills
If you do have a good reason for choosing the filing status as married filing separately, here’s how that might impact your ability to claim the child tax credit and the child and dependent care tax credit.
Understanding the Child Tax Credit vs. the Child and Dependent Care Tax Credit
The child tax credit (CTC) is a tax credit parents can claim for each qualifying child they have up to age 17. This credit can be used for any type of expense and is provided in recognition of the fact that parents who have children have less disposable income and more expenses than others who make the same levels of income.
By contrast, the child and dependent care tax credit (CDCTC) is a tax credit a parent can claim to offset the cost of the child or dependent care so the parent can work. The CDCTC is available only to parents who have to pay for child care or adult dependent care so that they can work. On the other hand, the CTC is available to parents who have children younger than age 17 regardless of whether they have to pay for care to work.
Effect of Married Filing Separately Filing Status on the Child Tax Credit
The American Rescue Plan Act of 2021 temporarily expanded the child tax credit during that year, increasing the CTC of $2,000 for children younger than age 17 to $3,600 for children under age six and $3,000 for children ages six to 17. Eligible parents also could receive advanced payments of one-half of the child tax credit each month while receiving the remainder when they filed their 2021 income tax returns.
However, the enhanced CTC was allowed to expire at the end of 2021 and has not yet been renewed. While some people believe the expanded child tax credit might be renewed, it hasn’t been thus far. This means that the existing child tax credit of $2,000 for children ages 17 and younger is currently what might be available to tax filers when they file their 2022 returns.
People who file their tax returns as married filing separately can only claim a reduced child tax credit. The amount that someone with this filing status can claim is one-half of the available credit, and only one parent can claim it.
Effect of Married Filing Separately on the Child and Dependent Care Credit
In general, married couples can only claim the child and dependent care credit if they file joint returns. However, there are a couple of exceptions under which one spouse might be able to claim the credit even when their tax filing status is married filing separately.
According to the Internal Revenue Service (IRS), someone who is living apart from their spouse or who is legally separated might still be able to claim the child and dependent care credit. If you are legally separated from your spouse, the IRS does not consider you to be married and allows you to take the CDCTC if you file as head of household instead of married filing separately. To file as head of household, your child must primarily live with you, and you must pay at least 50% of the costs of supporting them during the year. You will also need to pay for care so that you can work.
If you are married and living apart from your spouse, you can claim the
CDCTC if the following criteria apply:
- You file a separate tax return from your spouse
- You maintain a separate household for you and the qualifying dependent for more than half of the year.
- Your spouse does not live with you during the last six months of the tax year.
- You pay more than 50% of the costs of maintaining your home.
- You pay for child or dependent care during the year for the qualifying dependent so that you can work.
Get Help from TMD Accounting
Understanding the best filing status to choose for your situation and the potential impact on your available credits is important. To learn more about optimizing your taxes, contact TMD Accounting today at 1-856-228-2205.