Posted by Unifirst Financials & Tax Advisors

Separating? Make Sure You Know Everything about Your Tax Filing Status

Separating? Make Sure You Know Everything about Your Tax Filing Status

Before married partners decide to divorce, they must think and plan ahead if they want to navigate successfully a federal tax path that such parting of the company will entail. They must decide what to do with their assets and how to handle the child custody question. Additionally, they would need to figure how much tax they would have to pay the federal government. While the couple can take individual decisions on some matters, they would necessarily have to talk to each other to handle certain others. 

Fees Relating to Legal Matters

A divorcing couple cannot expect any offer of deductions for legal fees and court costs from the Internal Revenue Service. However, the couple is permitted deductions from elements of legal fees that relate to alimony or tax advice, provided such deductions pertain to tax years of 2017 or earlier. Such advice could relate to how various types of taxes – including estate, property and income taxes -- could be affected by the imminent divorce, at every level of taxation.

The potential deductions could benefit a divorcing couple if they got billing statements from their attorney itemized, clearly identifying charges according to the specific service billed. As already stated, the deductions cannot be availed for tax years 2018 and thereafter.

Status of Filing

If a divorcing couple fails to receive a separation maintenance decree by December 31, they would be considered by the IRS to have stayed married during the whole of the tax year. Thus, such couples must necessarily opt to file their tax return by choosing either "married filing separately" or "married filing jointly" status. Filing under a "head of household" or "single" status is not permitted.

The couple’s state of residence will also determine their filing options, considering that states’ divorce laws are honored by the IRS. In some states, such as Texas, a couple will be considered by the IRS to be married until their divorce goes through finally, regardless of whether they live together or are legally separated.

Consequences of a Joint Return 

The tax rate and the credits claimable are determined by one’s filing status. If a couple filed jointly, they could expect to pay less tax than if they filed individually. The IRS allows couples to compare the tax payable between the individual and the joint filing of returns. You can accomplish such a comparison by using a tax professional who is experienced in this area. Couples can then decide to use the filing option that would result in maximum savings.

However, couples heading for a divorce could find joint-filing a risky proposition. They would be jointly liable for any unpaid tax as well as for the payment of any related interest or penalties. If one of the divorced partners fails to pay any taxes due, the other partner would be liable to pay such dues. However, a remedy exists in the guise of Form 8857 Request for Innocent Spouse Relief, a form seeking information that if provided could relieve one partner from the tax debts of the other.

Consequences of Married Filing Separately

By filing separately, you may end up with a bigger tax bill. However, such separate filing will allow you to avoid being liable for your partner’s tax debt. Please note that separate filing will require the partners to see eye to eye on itemizing (standard deductions). If you have decided to itemize, then your partner must also compulsorily itemize. Each partner must itemize to account for deductions for which they are individually liable, such as property taxes and mortgage interest. However, medical expenses listed in a joint account could be divided into individual liabilities. While separate filing has its benefits, both partners may be forced to forfeit claims for many breaks offered by the IRS, including earned income and tax credits relating to higher education.

Consequences of Availing Legally Separated Filing Choices

The receipt of a decree of separation maintenance before December 31 will allow you to file with "head of household" or "single" status. You can use the "Head of household" status, provided you have a dependent, and bear 50% or more of home maintenance expenses. If you have a dependent child that spends less time with your spouse, you qualify to become the custodial parent of the child. If one of the partners agrees not to avail child-related credits, the other can claim credits and deductions as a custodial parent.

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