Taxes may be the last thing on your mind when you are in the middle of a divorce, but if your divorce wasn’t finalized by year end, you’ll have to consider your tax filing status before filing your next income tax return.
Should you file jointly with your soon-to-be-ex-spouse? Can you file single or Head of Household? The answer is not always clear-cut but can have a significant impact on your tax liability.
Understanding Your Tax Filing Status Options
Generally, your tax filing status for federal income tax purposes depends on your marital status, which is determined by state law.
Filing as Single
If at the end of the year:
- A final divorce decree has been issued, or
- You are legally separated from your spouse under a final decree of separate maintenance:
You are no longer married for tax purposes and must file as Single or Head of Household (which will be discussed in more detail below).
Your marital status is determined as of the last day of the year. Even if you lived with your spouse and were married eleven out of twelve months, if you were divorced or legally separated on December 31st, you are considered single by the Internal Revenue Service (“IRS”).
Married Filing Jointly
If at the end of the year:
- You do not have a final decree of divorce, or
- Separate maintenance agreement:
You are still considered married even if you lived apart from your spouse all year. In that case, you must file either Married Filing Jointly or Married Filing Separately.
Married Filing Jointly often results in the lowest tax liability for a married couple.
Married Filing Separately
Choosing the tax filing status Married Filing Separately results in the loss of several tax credits and deductions including the Earned Income Tax Credit, Child and Dependent Care Credit, and student loan interest deduction, among others.
In some cases, spouses may pay less in taxes by filing separately. Since tax brackets and the standard deduction for Married Filing Separately are half of those for jointly filed returns, spouses with equal incomes will generally owe the same tax under either filing status. However, if one spouse has significantly higher income or deductions than the other, the couple may owe less tax if they choose to file separately.
If you made deductible alimony payments under a separate maintenance agreement, the deduction can’t be taken on a joint return. In this case, you must file Married Filing Separately to claim the deduction.
Even if you owe more tax, there may be good reasons to file separately. When a couple elects the Married Filing Jointly tax filing status, the tax law holds both of the spouses responsible for the entire tax liability. This is referred to as joint and several liability. If the IRS audits your return and assesses additional tax, interest, and penalties, you could be liable for the entire amount, even if the errors on the return are related to your ex-spouse.
Provisions in your divorce decree holding your former spouse responsible for the tax will not prevent the IRS from attempting to collect the tax from you under the joint and several liability principles if your tax filing status was Married Filing Jointly.
How you allocate income and expenses between spouses for a Married Filing Separately return depends on whether or not you reside in a community property state. In community property states, community income and deductions are split 50/50 between the two spouses, unless the spouses lived apart all year.
In non-community property states, each spouse reports their own income and expenses. Expenses paid with joint funds are considered to be paid half by each spouse unless you can prove otherwise.
Another important difference to note is that when one Married Filing Separately spouse itemizes deductions, the other spouse must also itemize. Often, one spouse has large itemized deductions such as mortgage interest, real estate taxes, and charitable deductions but the other spouse would achieve the best outcome by claiming the standard deduction.
Head of Household
Under certain circumstances, even if your divorce was not final by year end, you may qualify to be considered unmarried and designate your tax filing status as Head of Household.
To qualify, you must:
- Be a U.S. citizen or resident during the entire year,
- File a separate return,
- Have paid more than half the cost of keeping up a home that your spouse did not live in during the last six months of the year, and
- Your home was the main home of your dependent child for more than half the year.
Choosing Head of Household as your tax filing status makes a lot of sense if you are separated or divorced and have a dependent child living at home. This filing status affords a lower tax rate and a higher standard deduction than a Single filer.
Innocent Spouse Relief
If you file a joint return that is later audited and additional tax, penalties and interest are assessed, you may be eligible for innocent spouse relief.
To qualify for innocent spouse relief, you must:
- File a joint return,
- Have an understated tax on the return due to erroneous information from your spouse,
- Be able to show that when you signed the return you did not know that the errors existed,
- Show that it would be unfair to hold you liable for the understated tax, and
- Make a timely election to qualify for the relief.
All five of the criteria must be satisfied to qualify under for innocent spouse relief.
Innocent spouse relief is not automatic. You’ll have to apply by filing IRS Form 8857. The form should be filed as soon as you become aware of the tax liability. The IRS will review and make a determination if you qualify for relief. Your former spouse will also be contacted by an IRS representative and asked if he or she would like to participate in the process.
Preparing Your Tax Return
Many family law attorneys recommend that their divorcing clients hire a single, neutral Certified Public Accountant (“CPA”) to help handle joint tax filings for a couple in the midst of a divorce. The CPA will gather documents, make inquiries of both spouses, determine income and expenses, and prepare tax returns based on the best tax strategies available under the circumstances.
Your CPA may ask both spouses to sign a Conflict of Interest Waiver. A conflict of interest occurs when tax advice benefits one spouse over the other. Avoiding conflicts when working with divorcing spouses is hard to avoid and for this reason, many CPAs decline to work with divorcing spouses. While others specialize in evaluating and advising on the tax and financial aspects of divorce.
Don’t expect that you’ll be able to keep secrets about your income, assets, and investments from your spouse if you are filing a joint return. It’s important for both spouses to recognize that any documentation provided, or discussions about the preparation of a joint tax return are available to both spouses, and joint returns must be signed (and therefore reviewed) by both spouses.
Take Advantage of Federal Tax Advice
Take the time to examine your personal situation and file under the applicable status that offers you the best tax advantage. Picking the right divorced filing status isn’t always easy, and you may find that you qualify for more than one filing status. To learn more, check out the IRS Publication 501that includes tax filing status information – or use the Interactive Tax Assistant on the IRS website to get answers to a broad variety of questions.
Don’t give in to the temptation to file jointly just because it’s available. Take the time to think through your choices to determine the best, divorced tax filing status for your situation. Otherwise, you could end up owing a lot more after an already taxing year.
How did you figure out your tax filing strategy during your divorce? Tell us in the comments below.
Need to know if you are in a community property state? Check out the Guyvorce State Divorce Laws Summaries for information on the divorce laws where you live.
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