Taxes are already complicated enough. Unfortunately, divorce makes it more complicated. Here are three rules of thumb every divorcee should try to remember:
1. Claim community income before the date of separation: In California, all property acquired during the marriage is presumed to be community property, including any property acquired derived from labor. This presumption ends at the date of separation. Any property acquired after the date of separation is presumed to be the separate property of the acquiring spouse.
When it comes to taxes, many spouses fail to follow these principles which apply regardless of filing status. Let’s use an example. Say Harry earns $5,000 per month and Wanda earns $10,000 per month. On July 1, 2015, Harry and Wanda separate and decide to file taxes separately. Harry may want to say his taxable income was $60,000 for the year, but that would be a mistake. Up until the date of separation, both Harry’s income and Wanda’s income belonged to the community and Harry must claim ½ of this total. In this case, Harry must claim $45,000 through the date of separation and $30,000 for his separate income earned afterwards. Wanda must also follow this principle. If both parties don’t follow the rules, this may trigger an audit.
2. Know when and when you can’t amend your filing status: Many people think they can’t amend their married filing separate tax return to a joint return after tax day. That’s not true! Up to 3 years after the tax day in which the return at issue was filed, individuals may amend their returns from separate to married filing jointly (of course, both individuals have to agree).
Warning: this only goes one way. Parties who file jointly can amend their returns up to and including tax day, but once tax day has passed, the IRS will not permit individuals to amend their returns from married filing jointly to any other filing status.
3. Head of Household status and dependency exemptions are not the same thing: There is much confusion about these two. They are similar in nature so this confusion is understandable. A dependency exemption is a tax deduction that a taxpayer is entitled to if that taxpayer has a qualifying dependent (which can include, but is not limited to, children). As relevant to divorce, a parent who cares for a child more than half the time is entitled to, but does not have to, claim a dependency exemption for that child. They can choose to release that exemption to the other parent. This would make sense, for instance, if the parent entitled to the exemption doesn’t have taxable income. In these cases, the exemption is completely wasted because that parent doesn’t have tax liability anyway. If the parent releases the exemption to the other parent who works, then the second parent’s adjusted gross income (and hence their tax liability) will be reduced. When it comes to child support, this results in a net positive for both parents. The second parent’s net spendable increases and a portion of the increase will be paid in child support to the first parent. In other words, everybody wins.
Tax Deductibility of Lump Sum Spousal Support Payment
“Head of Household” is a filing status and is generally much more beneficial than a mere dependency exemption. Not only does the standard deduction increase considerably, but the tax brackets themselves are also favorable. A parent who has a child for more than 50% of the time is entitled to Head of Household status. Unlike dependency exemptions, Head of Household status cannot be released to the other parent.
Feel free to contact us if you are considering a divorce from your spouse, a legal separation, or have questions regarding child custody and visitation. Nancy J. Bickford is the only Certified Family Law Specialist (CFLS) in San Diego County who is also a licensed Certified Public Accountant (CPA) with a Master of Business Administration (MBA). Don’t settle for less when determining your rights. Call 858-793-8884 in Del Mar, Carmel Valley, North County or San Diego.