- Publication 17, Your Federal Income Tax for Individuals
- Publication 501, Exemptions, Standard Deductions, and Filing Information
- Publication 504, Divorced or Separated Individuals
- Publication 505, Tax Withholding and Estimated Tax
- Publication 552, Record keeping For Individuals
- Publication 555, Community Property (for those living in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin)
Once the estimates are completed, it is now time to make one of the most important decisions of the entire divorce, how will you file your taxes?
How Will You File Your Taxes?
To be eligible to file under "Married filing jointly" status, you and your spouse must be legally still married (even if you are living apart) as of the last day of the tax year, December 31. To qualify for "Married filing separately" status, you must still be legally married as of the last day of the tax year. Finally, to file under "Single" status, you must be legally unmarried or legally separated as of December 31 and not eligible for "Head of Household" status. Head of Household would be defined as either a single person who provided more than half of the household maintenance costs AND whose household is the principal residence (defined as being more than one half of a year) of at least one dependent. If you are married but have lived physically apart on or prior to July 1 of the tax year, you must employ "Married filing separately" status.
If agreement on the filing status cannot be reached, it is accepted that the proper thing to do is to file separately. The reason for this would be two individual, separate returns can be amended to form a joint return anytime within three years. However, you cannot change a joint return into two separate individual returns at any time. Another advantage to filing separately is that you would not be held accountable should your spouse misrepresent any income or expenses on their tax return. If you do file jointly, you could be held accountable for any and all back taxes, interest, and/or penalties with respect to that joint return.
When filing a separate return, you will of course report only your income, exemptions, credits, and deductions. If your spouse did not work, you may claim an exemption for him/her. This, however, is slightly different in the Community Property States. Generally speaking, in these states, income earned and assets acquired during the course of the marriage are theoretically owned 50-50 by both spouses and is therefore considered to be "community property". Before choosing to file separately in a Community Property States, it is best to seek the advice of a tax professional. In addition to claiming separate income and deductions, you will most likely have to report half of the "community income" and claim one-half of the "community deductions". In determining just what is a community deduction, the rule of thumb would be if the expense in question was paid for out of community funds, then each spouse will file half the amount on their individual tax return.
With regards to claiming children as dependents in Community Property States, the exemption of a single child must be wholly claimed by one spouse or the other; the deduction may not be split in half If you have multiple children, two for example, it is possible for each spouse to claim one child each. However, if both of you attempt to claim the same child, the IRS will take a dim view and not allow the exemption on either return.
Oftentimes, filing jointly is the best way to go. A married taxpayer may claim the child and dependent care credits and, in the case of low-income taxpayers, the earned income credit. Also, some deductions, such as an dependency exemption for a non-working spouse or the deduction for a spouse's contributions to an Individual Retirement Account, can only be employed on a joint return.
Some of the other factors you should bear in mind and discuss with your tax advisor with respect to filing status would be the resulting tax rate, deductions and credits to be lost or gained, tax losses from a partnership or business losses, as well as potential liability for any potential misrepresentations by your spouse on with respect to their income or expenses. As previously mentioned, you could be held accountable for any misrepresentations by your spouse on a joint return and be forced to pay the resulting price is necessary, even if the divorce is already finalized.
This would be unless you could qualify as an "Innocent Spouse". Under these provisions, which basically hold true in both Community Property States and otherwise, you would not be held liable if you could prove the following:
- Your spouse seriously underreported substantial amounts of income
- You did not know of such misrepresentation and had no reason to know of such (which would actually be difficult since a spouse is supposed to read a joint return before signing it)
- It would be unfair to hold you accountable
- You did not receive any benefit from the unreported income
You could also qualify as an Innocent Spouse under either the Forgery Rule or the Duress Rule. Under the guidelines established by the Forgery rule, you would not be held accountable if you could prove that you had no income and therefore were not required to file a return. It would therefore be assumed that you gave no authorization for your spouse to sign your name to any joint return and you may be able to state that your spouse actually forged your name. However, if you DO have income and DO NOT file separately, the IRS will take it for granted that you intended to file jointly and therefore gave authorization for your spouse to sign for you. With respect to the Duress Rule, you must be able to prove that the pressures exerted upon you by your spouse were irresistible and that you would not have signed the return if these pressures were not exerted.
In the event that your spouse will not sign a joint return for whatever reason, you and your spouse will have to both file separately. If your spouse does not file a separate one or had no income or other earnings, you may file a joint return using your name only. However, this is possible only if it is beyond a shadow of a doubt that you intended to file together. If the spouse who is refusing to sign a joint return does so because they fear the other spouse's return is in some way fraudulent, the other spouse MAY NOT file a joint return without the other's signature.
If one spouse has entered into an agreement (known as an offer in compromise) to pay the IRS less than what is actually due, plus interest and penalties, it is still possible for the IRS to go after the other spouse to collect the outstanding monies. In addition, an indemnity clause in a marital agreement (where one spouse agrees to hold the other harmless for any tax liability) offers NO real protection from the IRS. In fact, the IRS can even seize a joint taxpayer's assets or property even AFTER it has been divided in a divorce decree to satisfy an outstanding account. If you marriage is annulled, the IRS views this as if the marriage had never actually taken place. Therefore, if joint returns were filed, then corrected, separate returns will have to be re-filed.
Once the decision to file a joint return is made, it should also be collectively determined what to do with any refunds or additional taxes that may occur. This decision should also be documented in writing as well to avoid any future misunderstandings or hostility. A simple solution would be to agree to split any refund or share an equal burden of any additional tax that may come due.
The tax issue is perhaps the greatest example of how important it is to have all arrangements with respect to the impending divorce documented in writing. Oftentimes during a divorce, the spouses reach understandings with respect to alimony and child support, but never bother to get the results down in writing on paper. Alimony is actually tax deductible, however, it will need to be documented by either a written agreement signed by both parties or by an actual court order. In other words, in the eyes of the IRS, word of mouth agreements are not enough to warrant a deduction. If you are receiving alimony, that too is income that must be reported. However, in order for alimony payments/receipts to be deductible, separate returns must be filed. Child support is never deductible, either for the parent who pays it, or the parent who receives it.