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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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