Tax Tip: Child Tax Credit Strategy: Why Professional Tax Preparation Matters

January 7, 2025
Emma Taylor
Client Service, Financial Planning, Investment Management, Tax Preparation

When high income couples file jointly, they often think they miss out on the Child Tax Credit. But if they file married filing separately, there’s an important nuance in the Child Tax Credit (CTC) calculation that can significantly impact their tax situation.

Background:

Income Thresholds: For married couples filing jointly, the CTC begins to phase out at $400,000. However, for those filing separately, the threshold is $200,000 per individual.
Claiming Dependents: Most do-it-yourself tax preparation software and less skilled preparers often assume, by default, that the taxpayer (not the spouse) will claim the dependents when filing separately. This assumption can lead to missed opportunities.
Strategic Filing: In some cases, filing separately and having the lower-earning spouse claim the children can result in a more favorable tax outcome, especially if their income is below $200,000.

The Strategy & Potential Benefits: This strategy can potentially allow the lower-earning spouse to claim some or all of the Child Tax Credits, even if the couple’s joint income would disqualify them.

Tax Tip Example Scenario – Consider a married couple where”

Spouse A earns $250,000

Spouse B earns $180,000

They have two qualifying children

If they file jointly, their combined income of $430,000 would phase out most or all of their CTC. However, if they file separately and Spouse B claims the children, they might qualify for a significant portion of the CTC, as Spouse B’s income is below the $200,000 threshold.

Conclusion

While married filing separately often results in a higher tax liability, in specific situations involving the Child Tax Credit, it can be advantageous. It’s essential to carefully analyze both filing statuses, adjusting the dependent allocation in your tax software, to determine the most beneficial approach for your clients.

Understanding the intricacies of the Child Tax Credit (CTC) for married couples filing separately can be complex, but it’s just one example of how professional tax preparation can save you money. 

ONE ADVISOR TWICE THE ADVICE^TM

Learn more about how this relates to your current financial plan? Give us a call at (410) 823-5442 or email [email protected].

Chesapeake Financial Advisors is a fee-only financial planning, investment advisory, and tax planning firm with offices in Towson, Columbia, and Frederick, Maryland.

For disclaimer, please follow our link below:

https://www.peakeadvisors.com/site/wp-content/uploads/2019/05/Compliance-Social-Media-Disclaimer.pdf