Filing taxes during divorce is an overlooked matter. People getting divorced are focused on the divorce process, their children, and what life will be like after the divorce. As a Pennsylvania divorce attorney, I have concluded that divorcing couples overlook the importance of tax considerations. Taxes are almost an afterthought. However, there are some basic concepts that divorcing couples should know that could help them save money. It is always advisable to consult with your accountant since tax laws are complex and they often change.
YOUR TAX FILING STATUS (IRS PUBLICATION 504)
Your filing status is used to determine if you must file a tax return, the standard deduction, and the amount of tax you are required to pay. The filing status also impacts claims to other deductions and credits. When determining a filing status, you must first look at your marital status on the last day of your tax year. You are considered “unmarried” for the whole year if you have obtained a divorce decree by the last day of your tax year or:
- You file a separate return,
- You paid more than half of the cost of keeping up your home for the tax year,
- Yours spouse did not live in the home during the last 6 months of the tax year,
- Your home was the main home for your child, stepchild, or foster child for at least 6 months of the tax year, and
- You must be able to claim the child as a dependent.
The foregoing does not include living in separate homes due to military service, medical treatment, attendance at college or university, and other similar temporary circumstances. Conversely, you are considered “married” for the whole year even if you are separated, but you have not obtained a divorce decree by the last day of your tax year.
MARRIED FILING JOINTLY
A married couple has the option of filing a joint return. When you file a joint return, you and your spouse’s income is included in the return. You and your spouse sign the return and you are both liable (jointly and individually) for any tax, interest or penalties. This means that after divorce, you and your spouse continue to be liable for tax, interest or penalties due on a joint return for a tax year ending before your divorce. After the due date of your tax return, you and your spouse cannot file separate returns if you previously filed a joint return.
MARRIED FILING SEPARATELY
A married couple also has the option of filing separate tax returns. Each spouse will report his or her income and deductions on a separate tax return. In this case, each spouse is solely liable for any tax, interest or penalties on his or her separate tax return. Filing separate tax returns is usually not advised, since you will often pay a combined higher tax. The IRS permits married couples who filed separately to change their filing status and refile with a joint return so long as certain conditions are met.
If you are unmarried or considered unmarried, you must file an individual return, unless you qualify as filing as head of household or qualifying widower.
SINGLE – HEAD OF HOUSEHOLD
Head of household is a filing status for unmarried taxpayers who keep up a home for a “Qualifying Person”. Qualifying Persons are typically relatives who must meet special requirements set forth by the IRS. There are unique advantages for filing as head of household:
- You can claim the standard deduction even when your spouse files separately and itemize his or her deductions.
- Your standard deduction is higher than when you file as single or married filing separately.
- You may be able to claim certain credits (e.g. dependent care credit).
- Income limits that reduce the child tax credit or retirement savings are higher than the income limits if you claim a filing status of married filing separately.
In order to file as head of household you must be:
- Unmarried or “considered unmarried” on the last day of the year,
- You paid more than half the cost of keeping up a home for the year, and
- A “qualifying person” lived with you in the home for more than half the year, unless he or she is your dependent parent, in which case, the parent does not have to live with you.
After a separation, it can certainly feel like you are single and no longer married, especially when you and your spouse are living apart (and perhaps with new partners) and no longer sharing expenses. But in the eyes of the federal government, you are still married until the day a state court judge makes your divorce final. Thus, you usually cannot file as a single taxpayer while your divorce is pending. Your only options are “married filing jointly” and “married filing separately”.
The intricacies of the federal tax code are far beyond the scope of this article, but, for many couples, there are usually disadvantages when filing as “married filing separately” tax returns v. a “married filing jointly” tax return (although there are many cases in which this is not true as well). To give an example, one spouse might file a “married filing separately” return and get a $1,000 tax refund, while the other spouse would file a “married filing separately” return and end up paying $15,000 with the return. Together this is an additional $14,000 payment that would have to be made with the taxes. That same couple, however, had they filed together in a “married filing jointly” return might owe an additional $9,000 in taxes. That’s $5,000 less than they would have had to pay collectively with “married filing separately” returns. These are just hypothetical numbers, but the point is that you and your separated spouse – even if you cannot agree on anything else – may be able to benefit one another by reaching an agreement, either in conjunction with a settlement agreement to work together on your taxes.
Experienced divorce attorneys are always looking at ways to help their clients save money and preserve their assets during and after divorce. Your taxes should never be an afterthought during your divorce. Never underestimate the importance of having qualified and experienced professionals (accountants and attorneys) assist you with your divorce. The Martin Law Firm, P.C. office is in Blue Bell, Pennsylvania. Contact us today for a free divorce case evaluation at (215) 646-3980.