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Tax
Aspects of Divorce: The Basics
Divorce
can affect your income taxes. Your written settlement
agreement should state how you and your spouse will handle:
Dependency
Exemptions
Dependency exemptions can sometimes be used
to benefit both spouses.
Generally,
the settlement agreement will state who is entitled to claim
which of the children, as well as various conditions under
which this will change. But the agreement only
determines what you and your spouse have decided about who is
entitled to the exemption. Under the Internal Revenue
Code section 152(e), the exemption belongs to the custodial
parent unless the custodial parent executes a release.
That release must be signed by the custodial parent and
attached to the non-custodial parent's return for any year in
which the non-custodial parent claims an exemption deduction.
The release can cover a single year, specific multiple years,
or all future years.
The
IRS form for the release is Form 8332. You can find this
form by going to the IRS website
and entering the number in the box on the left side called
"Search Forms and Publications."
Filing
Status and Final Return
Filing Status - Barring remarriage,
a non-custodial parent generally will be "single"
and a custodial parent may be "head of household."
A planning idea that can be a win-win in joint custody cases
where there is more than one child involved, though, is to
have each parent be a "custodial parent" with
respect to at least one child. In that way, both parents
may qualify for "head of household" status.
"Head of household" tax rates are more beneficial
that the "single" rate chart.
Final
Return - Unless the process of divorce begins and ends
within a single calendar year, the final return on returns can
be an issue. You and your spouse can execute an
agreement on how to share any savings from filing a joint
return.
A
taxpayer's marital status is determined as of December 31.
Generally the choice is between "married filing
separately" and a joint return. If the couple have
been living apart for the last six months of the year, it is
possible that one might qualify as "head of
household."
The
decision to file a joint return can have an impact beyond the
tax difference between a joint return and two separate
returns. Taxpayers have "joint and several
liabilities for deficiencies" on a joint return.
This means that you are responsible as a couple and that you
are responsible individually for errors on your joint tax
return. You may be liable for any deficiencies that the
Internal Revenue Service finds in your joint return. If
you are concerned that the other spouse might have unreported
income or be claiming improper deductions, it may be wise to
forgo any joint tax return savings.
If
you decide to file a joint return, you cannot change your mind
and file a separate return later. But if you file a
separate return, it is possible to file an amended joint
return later (Code Sec. 6013(b)(2)). Here is a
suggestion for how to approach the situation if you and your
spouse could get substantial savings from a joint return, but
you are concerned about being saddled with the other spouse's
deficiency. You and your spouse can file separate
returns. If you later learn that the other spouse's
return had no deficiencies, you and your spouse can file an
amended joint return prior to the expiration of the statute of
limitations, (generally, three years from the date the
original return was filed, or two years from the time the tax
was paid, whichever is later).
Special
Note: If your spouse has (in the past) hidden taxable
income from the IRS and you signed a joint tax return for
those years, you may be responsible for past due taxes if s/he
is caught. The IRS has a special "innocent
spouse tax relief" provision that can help if you
have been held responsible.
Allocation
of income from joint bank and brokerage accounts
If you don't file a joint return, a number
of complications may arise. If you and your spouse had
planned to pay your tax bill by having the taxes withheld
through each of your W-2's, then there is no way to shift the
withholdings to another return. If you and your spouse
made joint estimated tax payments, they may be divided in
whatever way you and your spouse agree. If there is no
agreement between you, the IRS will divide them based on
relative tax liability (IRS
Pub No. 505, (12/2002), pp. 35).
If it
becomes clear before all estimated tax payments are made that
you and your spouse may file separate returns, then the person
making the payments should submit them as individual estimated
tax payments.
In addition,
if you don't file a joint tax return, you and your spouse
should decide who is to report joint income and which of the
parties will claim joint deductions. This may seem to be
a simple matter but sometimes it is not.
For
example, look at the situation where one spouse has left
the marital home, but has continued to pay the mortgage.
Either side may claim for the interest deduction since the
house is in joint names. This is also true for
charitable donations paid from the joint checking account when
the two of you were living together. These areas can be
further complicated when both spouses have income. The income
may have been commingled during the year and used to pay
"joint" expenses. There may be additional
complications when one spouse's income is significantly
greater than the other's. This may provide
"proof" that the spouse with the higher income paid
more of the joint expenses.
Source: Joel
B. Charkatz, CPA, CVA, CFE is with the regional certified
public accounting and consulting firm of KAWG&F. For
more information, email jcharkatz@kawgf.com.
This information was first published in The Daily Record.
It is generalized information. Please consult with your
accountant, attorney or business advisor to determine how
these situations affect your individual tax situation.
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