One of the biggest tax issues that divorcing or separated couples face is the question of how to file their income tax returns. And a big question it is.
In general, couples who were legally “married” on the last day of the tax year (typically December 31st) are allowed to file as “married, filing jointly” or “married, filing separately”.
These choices raise questions for a couple going through a divorce or separation as the status you choose could have a big impact on your tax. It could be the difference between having to pay and getting a refund.
For example, couples who file “married, filing separately” cannot take the earned income credit nor can they deduct the cost of adoption expenses, educational expenses or dependent care. Separate filers also lose some of the child tax credit available to joint filers as well as deductions for capital losses.
Divorces however are not always amicable and many couples are dealing with a great amount of stress, anger and resentment. As a result, one of the spouses may choose to file separately out of spite. It can be helpful to seek assistance from your divorce attorney and your accountant if your estranged spouse wants to file separately merely to prove his or her point.
Divorcing couples may also be wary of filing jointly because they are concerned about the accuracy of their ex-spouse’s data and that’s a serious consideration indeed.
Under the tax laws, both spouses are equally liable for any penalties and fines resulting from an incorrect tax return. This liability can be exempted through what is called “Innocent Spouse Relief” but you must prove that you were unaware of the inaccurate data. It can be a difficult situation to extract yourself from after the fact.
In addition to these filing options, there are also some special rules that may allow a divorced or separated parent to file under the more favorable head of household filing status .
What about couples who were married for the majority of the tax year but obtained a divorce before the year was over?
If you obtained a divorce decree or legal separation decree before the last day of the tax year, then you are considered to be unmarried for the entire year and in this instance, you would file as “single” or if you qualify, as “head of household”. This assumes that you are considered to be divorced or legally separated under your state’s law by the end of the year in question.
If you and your spouse are separated but do not have a final decree of divorce or separate maintenance by the end of the tax year, you are considered to be married for the whole year for tax purposes.
Accountants will often use their income tax software to estimate your tax liability using several different tax filing statuses. They can show you the real-life differences between the “married, filing jointly” and “married, filing separately” choices before you make a final filing decision. They can do the same for “single” and “head of household.” This is definitely something for which you should seek professional advice before making a decision.