Divorce and Taxes

In 1789 Benjamin Franklin said, “Nothing is certain but death and taxes.” To this day his statement holds true. A marriage may be uncertain, but taxes are inevitable. Taxes live on—long after a divorce has been finalized.

Understanding your tax responsibilities and options can help you minimize taxation when getting divorced. In fact, the timing of your divorce is relevant to taxes owed, in terms of whether you and your spouse will be able to file jointly or will have to file separately. Postponing divorce based on taxation might be an important consideration.

Rules on Joint and Separate Tax Filing

Your marital status on December 31st, the last day of the tax year, determines your status for the whole year.

  • Couples legally married on the last day of the tax year may file jointly.
  • Couples legally divorced on the last day of the tax year may not file jointly, and have two filing options:
    1. Single
    2. Head of the Household

From the perspective of tax advantage, filing jointly usually gives the most benefit, and filing as head of household ranks second best. Filing as head of household requires that:

  • Spouses have lived separately for the past 6 months.
  • The home was the main residence for qualifying dependents (children, elderly parents, foster children, etc.).
  • The head of household (for at least half of the year) paid more than half of the household costs.
  • The head of household can claim exemption for his/her qualifying dependent(s).

Because each marital relationship is unique, you will have to weigh the benefits and drawbacks of various filing options.

Advantages of Joint Marital Filing

  • Deductions:
    • Dependency exemption (available to working spouse for non-working spouse)
    • Deduction for spouse’s IRA contributions
  • Credits
    • Child and dependant care credits (available to custodial parent)
    • Earned income credit (for low-income taxpayers)

Other considerations would be the tax rate and tax losses from a partnership or business. These would be points to address with your accountant or tax advisor.

Innocent Spouse

Another very significant factor to evaluate, if you are filing jointly, is whether there is any possibility that your spouse would misrepresent his or her income or expenses. You could be held liable, unless you could prove under the IRS Innocent Spouse Rule that:

  • You had no knowledge of the misrepresentation
  • You had no reason to know about the misrepresentation
  • Your spouse misrepresented information on your joint tax return
  • You received no benefit from the misrepresented joint income tax return

When you sign a joint tax return, you indicate under threat of perjury, that to the best of your knowledge, the facts in the tax return are true. Also, the IRS will consider your degree of financial sophistication when deciding whether the Innocent Spouse Rule applies. You may have trouble proving your innocence to the IRS, in which case, you would be held accountable, even if you are legally divorced when the tax return becomes an issue. You would owe back taxes, interest, and penalties for the amount misrepresented.

Advantages of Filing Separately

  • Within a three-year period, two individual separate tax returns can be amended to a joint return. (However, a joint return cannot be revised into two separate returns.)
  • No liability for the other spouse’s misrepresentation of income or expenses.
  • One spouse may claim a child as a dependent (both spouses may not).
  • One spouse may claim the other spouse as an exemption if the exempted spouse did not work. (Income and marital assets are owned 50/50 in Texas as community property. Each spouse may have to report half the income and half the deductions. Consult a tax advisor and lawyer.)
  • Alimony payments are deductible for the party paying (party receiving alimony must report alimony as income).

Tax Estimates for Joint and Separate Filing

Gathering all pertinent tax information and preparing returns for both separate filings and a joint filing is often very helpful in evaluating the benefits and detriments of each. Studying the results may help you as a couple to decide how best to minimize taxation while getting divorced.

How divorce matters are settled—property division of the house, investments, and responsibility for child support—have a tremendous impact on taxes. It is worth your while to consult financial advisors, tax experts, and a divorce lawyer to plan for how divorce affects taxation, especially when significant assets and income are involved.

Helpful Links:

IRS Publication 504, Divorced or Separated Individuals

The Wright Firm provides skilled representation to family law clients throughout the Lewisville, Texas, region, including the cities of Dallas, Plano, Frisco, Arlington, Richardson, Flower Mound, Carrollton, Corinth, Allen, McKinney, Garland, and Dallas County, Denton County, Collin County, Rockwall County, and Tarrant County.

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