It is that time of year when you need to file your income taxes and we want you to be informed. Your filing status for taxes depends partly on your marital status on the last day of the year. If you were still legally married (meaning there is no final divorce decree) as of December 31, 2011 you are considered to have been married for the full year and must file as either married filing jointly or married filing separately. For federal tax purposes, “marriage” currently only means a legal union between a man and a woman as husband and wife. Your filing status is important and is used for many things on your tax return, such as determining your standard deduction, whether you need to file a return, the amount of tax you owe, and whether you qualify for various deductions and credits. When it comes to your filing status, you do have options.
Married Filing Jointly
If you are still legally married, you and your spouse can file a joint tax return. Married couples do not have to be living together to file jointly. If you file a joint return you both must include all your income, exemptions, deductions, and credits on that return. Even if you or your spouse had no income or deductions, you can still file a joint return. You must balance taxes due against your risk of being jointly and separately liable for taxes, interest, and penalties on a joint return. If you question whether your spouse is reporting all income, or have little or no knowledge of your spouse’s income and finances, discuss this issue with legal counsel before signing a joint return. The Internal Revenue Service (IRS) can hold you liable for all taxes due on a jointly filed return, as well as penalties and interest, even if your spouse alone earned the underlying income.
Married Filing Separately
Legally married couples can also file “married filing separate” whether they live together or not. If you and your spouse file separate returns, you should each report only your own income, exemptions, deductions, and credits on your individual return. You can file a separate return even if only one of you had income. However, the married filing separately status rarely works to lower the family tax bill. For example, one major disadvantage is that you can’t have one spouse itemize and claim all the deductions while the other claims the standard deduction. Both husband and wife must either itemize or use the standard deduction. You can’t mix and match. So if one spouse itemizes and the other has nothing to itemize, that spouse would not then be able to claim the standard deduction, which might have reduced the amount of taxes owed.
Another disadvantage with “married filing separate” filers is that they can no longer take any relevant exclusions, credits, or deductions for adoption or education expenses. Likewise, various exclusion and exemption amounts will be cut for child and dependent care expenses, employer dependent care assistance, and alternative minimum tax. Here are some examples if you file separate returns with your spouse:
• You cannot take the Earned Income Credit.
• You cannot take the Child and Dependent Care Credit in most cases.
• You cannot exclude any interest income from U.S. savings bonds that you used for education expenses.
• You cannot take the Credit for the Elderly or Disabled unless you lived apart from your spouse all year.
• You may owe more taxes on Social Security income or railroad retirement benefits than if you filed jointly.
• You cannot deduct interest paid on student loans.
• You cannot take any education credits.
• You cannot take an exclusion for adoption expenses or the Adoption Credit in most cases.
Benefits of filing under this status include only having liability for the tax, interest, and penalties on your own return. The IRS would not pursue you for your spouse’s tax obligation for that same year. If the return is filed electronically, any refund due can be divided up and directly deposited by the IRS in up to three different separate accounts. Note, however, that some financial institutions will not allow a refund for a joint return to be deposited into an individual account, so if this option is being considered, the taxpayer should check with his or her bank.
Head of Household
If your decree of dissolution of marriage or legal separation is entered before the last day of the tax year, or the decree of annulment is entered before you file your return, you may be able to file your return as “head of household” if other requirements (detailed below) are met. Even if your decree has not been entered and your case is still pending, you may be eligible for head-of-household filing status if your spouse did not live in your home for the last six months of the tax year. This is an attractive alternative, as you do not have the joint liability that comes with “married filing jointly”, and the exemptions, credits, and deductions are not as limited as when you file “married filing separate.”
The other basic requirements for this filing status are that you paid for more than 50 percent of the upkeep of your home, including rent/mortgage, taxes and insurance, repairs and maintenance, utilities, and even groceries; your home was the main home of your child, even stepchild or foster child, for more than half of the year; and you are eligible to claim an exemption for the child, even if you sign the exemption waiver to allow the noncustodial parent to claim it. Other qualifying persons, such as a grandchild, parent, grandparent, or sibling for whom you provide care can provide a basis for you to claim head of household, so discuss your specific facts with your lawyer. In most cases, if one spouse is able to file “head of household,” the other must file “married filing separate.”
If you meet the requirements for this filing status, you can itemize your deductions or elect the standard deduction, whichever you choose, and regardless of what your spouse chooses. The standard deduction is higher than if you file “married separate,” and your tax rate will probably be lower under this filing status than under “married separate.” You also would be able to claim credits, such as dependent care credits and the earned income credit, which otherwise are not available to you under “married filing separately.”
You can only file your income tax return under the single status if your final decree of dissolution of marriage or legal separation was entered by December 31, 2011 or if a decree of annulment has been entered before you file your taxes. As to the divorce or legal separation decree, if the decree is entered, even on the very last day of the tax year, the IRS deems you unmarried for the entire tax year. This can be a crucial planning step in your divorce. Once your divorce or legal separation decree has been entered, or even an annulment in some jurisdictions, the final spousal support and property division awards need to be analyzed for any tax implications.
Which Parent Claims the Dependency Exemption?
As a general rule, a child can only be claimed on one tax return. This may present a problem if you are already divorced or separated. Only one parent can claim the dependency tax exemption. The parent who claims the dependency exemption is also entitled to the $1,000 per-child tax credit for children under the age of 17, assuming his or her income is not too high. This is usually a straightforward decision if you have a divorce decree which names the custodial parent. If not, you are considered the custodial parent if your child lived with you for a longer period during the year than with your former spouse. Sometimes the noncustodial parent can claim the exemption if the custodial parent signs a waiver pledging that he or she won’t claim the child. If you are the parent who claims the dependency tax exemption, you can also claim other credits, such as the child tax credit or one of the education credits. If you can’t claim the dependency tax exemption, you can’t claim those credits even if you pay the education bills.
Can You Deduct Child or Spousal Support?
Spousal support is the money paid to you or your former spouse, as agreed upon in your divorce or separation arrangement. If you pay spousal support, you can deduct it on your tax return. If you receive spousal support, you have to report it as income on your tax return. For the payments to be qualified as spousal support, the support amount must be written out in your separation or support agreement, a stipulation of settlement in your pending divorce again, or a court order or judgment. For example, if you are court ordered to pay your spouse’s medical expenses, rent, and utilities, these payments can be treated as received by your spouse and then paid to a third party, and so deemed “support.” If your spouse is ordered to pay premiums on a life insurance policy (insuring his or her life), to the extent that you own the policy, those premiums can be deemed taxable to you. Or, if you are ordered to pay expenses on a jointly owned home, even some of those payments may be deemed spousal support and if other characteristics of support are present, half of the total payments can be deductible by you and taxable to your spouse. However, you may claim only one-half of the interest paid as an itemized deduction.
Money received for child support is not considered spousal support. Child support is not deductible for the person who pays it, nor is taxable for the person who receives it.
If you have any questions or would like to hire an attorney for your divorce, contact the Law Offices of Nancy J. Bickford in Del Mar, Carmel Valley, North County and San Diego. She is the only Certified Family Law Specialist in San Diego with an MBA and CPA. She is dedicated to addressing divorce needs in a positive, collaborative manner that resolves conflict, avoids court intervention whenever possible, and helps families restructure their relationships to benefit all members during and after the divorce process. Call 858-793-8884 to make an appointment today.