Separation and Divorce at Tax Time

Couples who are have decisions to make at tax time, which can affect the amount you get back in a refund, or how much you have to pay. You are able to make some of these decisions on your own, however there are a few that require both parties to be on the same page.

When you decide to separate from your marriage, you must prepare for some of the situations you will face when tax time rolls around. For example, you’ll need to determine how to split assets and deal with custody of dependents, and you’ll have to decide how each of you will pay the government.

Legal Fees

The IRS doesn’t allow for any deductions for money spent on legal fees and court costs in the proceedings. You can deduct the costs you spent on legal tax advice and alimony, however, and you can determine which portion of your court costs are related to these. You can deduct expenses from counsel on how your separation will affect a variety of tax situations. Be sure that your attorney provides you with an itemized receipt that clearly states the amount charged for each service.

Your legal married status by December 31st of the tax year determines which filing status you can use. If you have no divorce decree by the final day, then you must use either “Married, filing jointly” or “married, filing separately” as your tax status. You won’t be eligible to file “Single” or “Head of Household”.

Divorce laws are governed by the states, and the IRS defaults to the state guidelines, which means the state in which you live can also affect your tax options.

Credits are related to the filing status you use, and some aren’t available for certain filing statuses. IF you file a joint return with your spouse, you may have a lower tax liability than if you file separately. It may be beneficial to you to determine your better option by calculating your taxes as a separate entity and a joint party.

If you file a joint return with your spouse, you share responsibility for any taxes owed, along with interest and penalties. Be sure your estranged spouse won’t leave you hanging with all the tax liability, because regardless of who owes the taxes, both parties share responsibility. You may be able to claim relief by filing Form 8857.

Separate Return

While filing separately from your spouse nets a higher tax bill, it ensures you are not responsible for the other party’s taxes. When you are married and file a separate return, you both have to use the same method of deduction. If you chose to itemize deductions, you both must itemize. When itemizing, you must include only what you individually paid toward expenses such as mortgage interest and property taxes. You can split medical expenses if paid from a joint account. Using married, filing separately filing status disqualifies you for the Earned Income Tax Credit and higher education credits.

Legal Separation

If you received a legal decree of separation prior to December 31st, you are considered “unmarried”, which allows you to file using the Single or Head of Household status.

Head of Household has additional requirements, such as supporting a dependent and providing over half of the expenses related to maintaining a home. You are a custodial parent if the dependent child lives with you for more time than the other parent. Only one parent can claim a child as a dependent, and the spouse may have to waive his or her right to claim the child by checking Box 6a on a Form 1040. Usually, whoever claims the dependency gets to claim other related child credits.

Exemptions

If you are the custodial parent but want to allow your estranged spouse to claim the child as a dependent for the exemption you’ll need to sign Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. Your spouse will need to attach it to their tax return. You can still file as head of household and receive tax breaks such as child and dependent care deductions, as long as you remain the parent with custody.