Time for the exceedingly exciting, significantly sexy topic of taxes and divorce tax planning. Brings to mind the classic episode of The Simpsons that begins with our favorite neighbor rushing to file on January 1, to Homer rushing his bundle past the shutting doors at the close of the post office on April 15th. Whether you go about your taxes Flanders’ style or a la Simpson, you’ve got to do them. But what you should do depends on whether you’re getting separated, getting divorced or already divorced.
First, you’ve got to decide whether to file jointly or separately. If you want to file a joint return, you can only do so if you are still married at the end of the tax year (i.e., December 31). You and your ex-spouse-to-be also must both agree to the filing, which would be “Married Filing Jointly.” Warning: if a court has already issued a divorce decree, then you cannot file jointly for the year in which that decree was issued. No exceptions. Instead, you must file either as “Single” or “Head of Household.” Confused? Of course you are. We’re talking taxes, not baseball. Don’t worry – we’re going to go through all of your options, including the pros and cons, and what you’ll need to qualify for each of them.
Second, we’re not professional tax advisors and everyone’s case is different. So be absolutely sure to consultant your accountant, tax advisor or tax attorney. With that out of the way, let’s get started with divorce tax planning.
Married Filing Jointly (allowed only if you’re not legally divorced). In many cases, but depending on you and your spouse’s respective incomes, credits, deductions, and such, this will save you money. But also keep in mind that each of you is totally responsible (“jointly liable”) for ALL the taxes due on the return, including any tax deficiencies, interests, and penalties. If you’re spouse can’t pay her share, they’re coming for you. You can sometimes protect yourself with a “Tax Indemnification Agreement” – ask your tax advisor.
Sometimes, even the IRS will relieve one spouse of liability for the other under one of three types of relief: “innocent spouse,” “separation of liability,” and “equitable relief.” All the juicy details are in IRS Publication 971. It’s great bedtime reading, but you’re best asking your advisor if you think you might qualify. For the sake of this article, we’re going to just assume that you’re cool enough with your ex that you don’t have to worry about backstabbing and tax brawls. If you’re still married but your relationship is so fractured that you do have to worry, then the benefits of joint filing are likely outweighed by the potential liabilities associated with your difficult divorce.
Head of Household. You qualify as the head of your household only if:
- You and your ex lived apart for the last six months of the year (don’t even skimp on one day, as that’s breaking the law),
- So long as you paid more than half the cost of keeping up a home for your kids (if any), and
- Your kid(s) lived with you for more than six months during the tax year. If so, you’ll also be able to claim a dependent exemption for each kid.
- Plus, You’ll also need to have paid more than half the cost of maintaining the home for the tax
year. Cost means rent/mortgage, taxes, insurance, utilities, and food for the members of the household.
If you qualify to file as Head of Household, then your spouse MUST file as “Married Filing Separately.” If you both file as Head of Household (which is not allowed), expect the IRS to be very unhappy with you. If it is your spouse who qualifies as Head of Household, therefore, you must be the one to use “Married Filing Separately.”
You might ask: with all those requirements, why would I want to even bother trying to qualify as Head of Household? ITTS! – It’s the taxes, stupid! Turns on that filing as “Head of Household” generally gives you a lower tax liability than “Married Filing Separately” would. Among other things, an HOH filing allows you to claim the standard deduction even if your spouse itemizes deductions of his/her own. This means that, as HoH, you can claim additional credits such as the dependent care or earned income credits.
Can you file as HoH after the divorce has been finalized, too? YES! So long as you continue to pay more than half the cost of maintaining the home for the tax year and your children live with you for more than half the tax year, you are one lucky son of a gun. Not only do you get to raise your little monsters but you get some tax benefits to top it off.
Married Filing Separately. If you have to file with this status, you won’t qualify for certain tax breaks, or your tax breaks might be limited. For example, you won’t be able to take the student loan interest deduction or the real estate loss allowance, even if you and your spouse lived together. You also will not be able to take the education credits, the “Child and Dependent Care Credit” or the “Adoption Credit” unless you lived apart for the last six months of the tax year. You can’t even deduct legal fees for the divorce or separation itself. But you can deduct legal fees to get or collect alimony.
If you do use the Married Filing Separately status, then both you and your spouse (or soon-to-be-ex) should respectively report only your respective incomes, exemptions, deductions and credits on your individual returns. You can do this even if only one of you had income.
Single. If your divorce decree has been finalized, and you also do not qualify to file as “Married Filing Separately” or “Head of Household,” you can still file as “Single,” but only provided that you have been unmarried for the whole year or you have obtained the final decree of divorce or separate maintenance by the final day of the tax year. State tax law may vary. Follow it accordingly and again, consult your advisor.
Outsmarting The IRS. Don’t. This only happens in movies. Some people have divorced in one year just so they could file taxes as unmarried individuals and reduce their tax burden, all with the intention of remarrying the next year. You might get away with this if you live in Hollywood, because everyone there gets divorced and remarried a couple of times a year. But for us normal folk, this is not something you want to do.
Special Case: Annulments. What happens if your marriage existed and then never existed? That’s called an annulment. It dissolves the marriages and makes it so that it never legally happened. Hint: This is really, really hard to do if you have kids, because after all, they really did happen. Annulments are also required by the Catholic Church if you wish to be remarried in the Church, for example, but again this is a special case for couples without kids. Let’s say you do obtain a legal annulment. Then you have to go back to every tax return you ever filed and amend and refile those returns as if your marriage had never existed. You’ll need a tax advisor for that, too.
Wrapping Divorce Tax Planning All Up. So, what have we learned here about divorce tax planning, gentlemen? “Head of Household” or “Married Filing Jointly” are options for newly divorced men, so long as you qualify accordingly. (You can’t file as “Single” until your divorce has been finalized for the whole of the year.) You can still file jointly, but you must be careful. If you and your former flame are on the outs, don’t entrust serious matters such as tax payments to one another. If you can be civil not just today, but for some time to come, it’s a good way to go. You’ll each be responsible, however, for the entire tax bill, even if one of you bails on the other. Lawyers call this “joint and several liability.” We call it “getting screwed.” But it’s the law, so you need to know it. This means that if you do file jointly, you had better play nice, because you wouldn’t want her to leave you high and dry – or the other way around. On the other hand, if you engage in some astute planning, you can legally leave the IRS with the least amount of money possible and you with the most. And that’s one thing you and your ex- should be able to agree on when it comes to divorce tax planning.