Tax Filing Issues for Divorcing Spouses

Norris Family Law

Q: I am separated and getting a divorce. What is my tax-filing status?

A: The answer depends on your marital status as of the last day of the year. If your marital status was terminated on or before December 31, 2017 you are unmarried for tax purposes and cannot file a joint return for 2017. You must file separately, or as Head of Household if you qualify.

If you were still married on December 31, you have the option of filing Married filing Separately or, if your spouse agrees, filing a joint return.

In either case (whether still married or not on December 31), a person may be able to qualify for filing as “head of household”. To qualify for this filing status, the person must have been separated for over half the year and provide the principal residence of a qualifying child.

Q: How do I decide whether it is better for me to file singly or jointly with my spouse?

A: There are a number of things to consider:

…..Which will result in a lower total tax? (You can determine this by asking your CPA or tax preparer.)

…..Are you willing to be “jointly and severally” liable for the taxes? What this means is that on a joint return, each spouse is responsible to the IRS for the taxes owed; if the full amount is not paid, the IRS can look to either party (often, the one with the more easily reachable income or assets) for payment. If your spouse is financially responsible, with a good history of on-time tax payments, filing a joint return may make financial sense. Otherwise, consider carefully whether you should take on the additional financial obligation.

…..When persons are in the process of a divorce, they often are uncertain as to who should take certain deductions, or declare certain income, because there are so many financial and property unknowns until their case is resolved. As a practical matter, it often makes sense for them to file a joint return to avoid having to argue over this (and possibly end up with filing inconsistent individual returns, which could trigger a tax audit).

…..Remember that filing jointly requires two willing spouses. It can only be done by agreement.

No one can force the other party to sign a joint return, and no judge can order it.

Q: Can my spouse and I decide by agreement which of us will file as “Head of Household”?

A: No. This is not a matter of agreement. It depends solely on whether the parent qualifies.

Q: Can we decide by agreement who takes our child (or children) as dependency exemptions?

A: Yes, parties can agree, or a judge can order this.

Q: If we were separated during 2007, and we file separate returns, who declares which items of income?

A: Unless the parties have a prenuptial or postnuptial agreement saying otherwise, all earned income (salaries, bonuses, and other compensation for work) is community (i.e., owned equally) if earned prior to the parties’ separation. Each party will have to report half the community earned income on his/her return. A person’s income earned after separation is l00% his (or hers), and is reported on that person’s tax return.

Tax issues are complex, especially so when persons are in the process of divorcing. You should consult with your CPA or other tax expert for information and answers specific to your individual financial situation.

Tax Issues for the Newly Single Person

Married persons typically file their tax returns jointly, but after a divorce they need to deal with new tax filing decisions and issues. Here are some of them:

Dependency Exemption: In any given year, only one of the parents may claim a child as a dependent for tax purposes. The parent with custody for the greater portion of the year gets the dependency exemption. In shared custody, this means that the parent with whom the child lives for the greater amount of time gets the exemption. However, the court can order, or the parties can agree in their settlement agreement, that the dependency exemption will be transferred to the parent who has the child the lesser amount of time. It can make economic sense to do this where the parties’ respective tax brackets mean that a shifting of the exemption will result in less overall tax, and thus more money available for support. (A custodial parent also may release the exemption to the other parent by filing with the IRS a release form either on an annual basis, or once to cover future years.)

Head of Household: A parent can claim head of household filing status even if he or she does not have the dependency exemption for the child. To qualify, the taxpayer must maintain his or her home as the principal residence of the dependent.

Significance of December 31: A person who is divorced by December 31 is treated by the IRS as unmarried for the entire year, and is treated as a single taxpayer. (This is why many persons elect to “bifurcate” their cases so that they get a judgment terminating their marital status by the end of the year, even if the rest of their divorce case has not been resolved.)

Joint and Several Liability: Divorced spouses have continuing liability for their previously filed joint returns. This means that each is responsible for any taxes due on joint returns.

These are some of the common issues that divorced persons should be aware of. There are, of course, many other issues of much greater complexity. You should always get the advice of your CPA or other tax professional.