One of the most frequent questions we get this time of year from clients in the middle of a divorce is “what do I do about my taxes?” For couples without children the answer may be as simple as working out a filing status. For couples with children, the answer can be more complicated. Custody and child support orders/agreements may have an impact on the each parent’s tax circumstances. Specific individual circumstances should be reviewed by an accountant or tax attorney, but some general information can help take the guess work out of what is usually already a stressful situation.
Your filing status depends in large part on your marital status on the last day of the tax year. Basically the two options are “married” or “unmarried.” It seems like common sense, but how the question of marital status is answered will play a role in determining what exemptions and credits you may be eligible for. IRS rules determine which category you fit into.
“Married persons” have the option of filing either as “married, filing jointly” or “married, filing separately.” For federal tax purposes, “marriage” means only a legal union between a man and woman as husband and wife. If on the last day of the tax year you are married, then you qualify as “married persons.” Generally, if you are separated on the last day of the tax year but have not obtained a final divorce or separation decree, the IRS considers you to be still married.
Typically a couple filing “married filing jointly” receives a higher level of exemptions, deductions and credits. It may be worthwhile, however, for each spouse to calculate their tax obligation individually as well as jointly before deciding which status to choose. To file jointly at least one spouse must be a U.S. citizen or resident alien on the last day of the tax year. A joint return can be filed even if only one spouse had income during the year. To be a valid “joint return” both spouses must sign the return. While the potential increase in exemptions, deductions and credits may make filing jointly attractive, it is important to keep in mind that both you and your spouse may be held “jointly and individually” responsible for any tax, interest and/or penalty that is owed. This means that you could be responsible for all of the tax obligation, even if all income was earned by your spouse. There are exceptions to “joint liability” but you must meet certain requirements before the IRS will relieve you of your obligation. It is also important to keep in mind that any overpayment shown on your joint return could be applied to your spouse’s past-due tax debt. Again, there are exceptions to this rule but you must meet certain requirements before the IRS will exempt you from liability.
For some couples in the midst of separation or divorce, the risks associated with filing jointly may outweigh the potential for a higher tax usually occurring when filing as “married filing separately.” No joint liability is present, and each party is responsible for only for the accuracy and resulting obligation of their respective filing. Typically, however, filing separately will result in a higher combined federal tax than if you file jointly. Unless you can establish “head of household status, filing separately also keeps you from claiming certain credits and deductions, including credit for child and dependent care expenses (in most cases) and the earned income credit. As mentioned
earlier, it is important that you speak with an accountant or tax attorney before deciding which filing status you, as a divorcing or separated spouse, should use.
“Head of Household”
Filing as head of household as advantages, particularly if you are filing as “married filing separately.” You can claim many of the credits and deductions not typically allowed when filing separately. “Head of household” status has three requirements: 1) you are unmarried or “considered unmarried” on the last day of the tax year; 2) you paid for more than half the cost of keeping up a home for the year; and 3) a qualifying person lived with you in the home for more than a year.
Status as “considered unmarried” requires that your spouse did not live in the home during the last six months of the tax year and that your home was the main home your child, stepchild or foster child for lived in for more than half the year. You must also be able to claim an exemption for the child. (It is possible, in some circumstances, to claim the child as an exemption if when the noncustodial parent is claiming the same exemption. The IRS will apply the “tie breaker” rule when both parents claim the same child.)
Paying for more than half the costs of keeping up the home for the year applies only to costs related to the home: rent, mortgage interest, real estate taxes, insurance, repairs, utilities and, interestingly, food eaten at home. Costs related to clothing, education, medical treatment, life insurance and transportation are not in included in the calculation.
You and your child (“qualifying person”) can be considered to live together even if one or both of you are temporarily absent from the home because of illness, education, business, or military service. The assumption is that in such circumstances you or your child will return home after the temporary absence. You must, however, keep up the home during the absence in order to qualify as head of household.
Exemptions for Dependents
The term “dependent” means other a “qualifying” child or relative, but for purposes of this article the focus is on claiming a child as a dependent. One exemption is allowed for each child you can claim as a dependent. IRS rules about claiming a child as dependent when the parents are divorcing are fairly detailed. New rules were put into place in 2009. The rules for divorced or separated parents also apply to parents who were never married.
To be a “qualifying child” the child must be your son, daughter, stepchild, foster child. The child must be under age 19 at the end of the year, under the age of 24 and a full time student, or any age if permanently and totally disabled. The child must live with you for more than half the year, and the child must not have provided more than half of his/her own support for the year.
Even if the child meets the test for “qualifying” as dependent, you must still be the parent entitled to claim the child for exemption as a dependent. Typically, the residency requirement (living with the parent more than half the year) means the “custodial” parent
has the right to claim the exemption. Under certain circumstances, however, the noncustodial parent can claim the qualifying child as a “dependent.” For a noncustodial parent to claim the exemption, the parents must be legally divorced or legally separated, separated under a written separation agreement or have lived apart at all times during the last 6 months of the year. The child must receive over half of his/her support from the parents and be in the custody of one or both parents for more than half the year. Lastly, the custodial parent must sign a written declaration (“Form 8332”) that he/she will not claim the child as a dependent for the year. The noncustodial parent must attach the declaration to his/her own return. Only when these requirements are met ca a noncustodial parent claim the qualifying child as a dependent.
If you are the custodial parent who is considering allowing the other to claim the qualifying child, keep in mind that whoever gets to claim the child will take all benefits (assuming eligibility is met for each) based on the qualifying child, including the child exemption, child tax credit, head of household filing status, the credit for child and dependent care expenses, the exclusion from income for dependent care benefits and the earned income credit. These benefits cannot be split up, with one parent taking some and the other taking the remainder-it’s an all or nothing proposition. It cannot be said enough- speak with an accountant or tax attorney before making any agreement.
It happens sometimes that divorcing or separated parents will both claim the qualifying child as a dependent. In that case the “tie breaking” rule applies. Where only one of the couple is the parent of the child, the parent wins. In cases of two parents not filing a joint return, the parent with whom the child lived for the longer period during the tax year will have the right to claim the child. Where the parents file separately and the child lives with both parents equally during the year, the parent with the higher adjusted gross income will have the right to claim the child.
The information provided here is intended only as a general overview. The consequences of not understanding your options can have serious consequences- both in terms of penalties and in lost benefits. Plenty of information is available from the IRS, but federal tax rules can be complicated, particularly when you are in the midst of a divorce or separation. Application of any one particular rule will often depend on individual circumstances, and qualifying for a particular benefit will often require satisfying multiple requirements. Consult with a qualified accountant or tax attorney before making any decisions. For more information regarding tax issues for divorced or separated couples, click here.