Married Filing Separately and First Child

[Albertini1]

Hello,

My wife and I do married filing separately as it is advantageous since she is on an income-based repayment plan for her student loans. We live together and are having our first child in October. We had a few questions and wanted to talk with an expert about our general situation and also the below specific questions:

1) Can we choose who claims the child on their tax return? 

2) Based on #1 above, does it matter which of our health insurance the child is under?

3) Based on #1 and #2 above, can one or both of us establish a Dependent Care FSA through our employer to pay for child expenses?

4) We believe we can still claim part of the child tax credit due to our married filing separately status but wanted to confirm. 

Thank you!

[VincentL12345]

1) Can we choose who claims the child on their tax return? 

No. The IRS has tiebreaker rules that decide who can claim the dependent. Typically, if you live together and file separately, the person with the higher adjusted gross income claims the dependents.

2) Based on #1 above, does it matter which of our health insurance the child is under?

No. It is appropriate to pay the least expensive. Also there is no tax deduction for it.

3) Based on #1 and #2 above, can one or both of us establish a Dependent Care FSA through our employer to pay for child expenses?

No. By default it will be the high earner spouse since the low earner has no child to reference the expenses too.

4) We believe we can still claim part of the child tax credit due to our married filing separately status but wanted to confirm. 

If you're married filing separately, the child tax credit is not available for the total amount you'd receive if you filed jointly. You can take a reduced credit that's equal to half that of a joint return. You may be able to receive a partial benefit for the child and dependent care credit.

Only one taxpayer (or married couple filing jointly) may claim any one child for the purposes of the Child Tax Credit and the Additional Child Tax Credit. If a child is claimed as a dependent on more than one tax return, the IRS will determine who gets the claim according to a set of tiebreaker rules.

[KochuK]

Hi Albertini1, thank you for joining the "Ask the Experts: New Dependent" special forum today.

Congratulations on your upcoming new baby in October 2021. What a happy life event!

To answer your questions:

1) Yes, you can choose who claims the baby in your Married Filing Separately tax returns.

2) For Federal, there is no fee/penalty for not having health insurance in 2020. If you lives in a state that requires you to have health insurance coverage, and you don't have coverage (or an exemption), you will be charged a fee. Check with your state. In general, It does not matter which parent's health insurance policy covers the baby.

3) The Dependent Care FSA via employer will be on the W-2, Box 10 of the parent who is  claiming the baby as the dependent. Box 10 amount is factored into Form 2441 Child and Dependent Care Expenses, Part III Dependent Care Benefits, and overall calculation.

https://www.irs.gov/pub/irs-pdf/f2441.pdf

The other parent has no dependent. Then his/her W-2, Box 10 amount, if any, will become taxable income. TurboTax will take care of all calculations.

4) A baby born during 2021 is considered qualifying child for the whole year. Subject to filing status and income limitation, you would be able to claim full child tax credit. Please use the Eligibility Assistant to see if you qualify for Advanced child tax credit payments, which is an estimated payment.

Later this year, you should be able to use the Child Tax Credit Update Portal to update qualifying child information (not available now.) Below is the link for online tools.
Advance Payments of the Child Tax Credit
Which Online Tool Should I Use?
https://www.irs.gov/pub/irs-pdf/p5534e.pdf

Hope this helps.

[Albertini1]

Thank you VincentL10583. That makes sense and is very helpful.

A few more questions:

5) Spouse #1 (with higher AGI) will claim the child and open a Dependent Care FSA. From what we can tell, under married filing separately status the max contribution to a Dependent Care FSA is either $5,250 or $2,500. Please confirm. 

6) Spouse #1 already has a Health Savings Account (HSA) established with their Consumer Driven High Deductible (CHDP) Medical Plan. Can Spouse #1 use their HSA in addition to the Dependent Care FSA to pay for child care expenses for child? (due to being on the same tax return. Or are HSA funds only reserved for Spouse #1's medical expenses?)

7) Spouse #2 has better and broader health insurance options (HMO) and will add child to their health plan.  It seems logical that Spouse #2 cannot use their current FSA to pay for child care expenses since child will be a dependent on Spouse #1's tax return. Please confirm. 

Thank you!

[Critter-3]

5) Spouse #1 (with higher AGI) will claim the child and open a Dependent Care FSA. From what we can tell, under married filing separately status the max contribution to a Dependent Care FSA is either $5,250 or $2,500. Please confirm.    

If you file separately neither of you can claim the Child Care Credit so anything withheld from your wages will be added back on the return. 

The law increased 2021 dependent-care FSA limits to $10,500 from $5,000, offering a higher tax break on top of existing rules allowing more time to spend the money.

As more companies adopt the FSA changes, couples can strategize to maximize their tax write-off, financial experts say. 

  https://www.cnbc.com/2021/05/25/how-couples-can-maximize-their-dependent-care-fsa-.html

6) Spouse #1 already has a Health Savings Account (HSA) established with their Consumer Driven High Deductible (CHDP) Medical Plan. Can Spouse #1 use their HSA in addition to the Dependent Care FSA to pay for child care expenses for child? (due to being on the same tax return. Or are HSA funds only reserved for Spouse #1's medical expenses?)  An  HSA doesn't pay for child care expenses ... only medical expenses.

https://www.kiplinger.com/article/insurance/t027-c001-s003-can-i-contribute-to-both-an-hsa-and-an-fsa.html

7) Spouse #2 has better and broader health insurance options (HMO) and will add child to their health plan.  It seems logical that Spouse #2 cannot use their current FSA to pay for child care expenses since child will be a dependent on Spouse #1's tax return. Please confirm.    Again ... the HSA cannot pay child care expenses ... so you can have the FSA  and she can have the HSA with the child on it.  But once again the money you put into the FSA is NOT deductible on the federal return ... that will be added back into your income on the MFS return  HOWEVER  it will escape SS & Medicare taxes on the paycheck.