Our Monthly Tip, as featured in Family Lawyer Magazine:
The tax filing deadline is fast approaching. If you have been filing jointly with your ex-spouse, filing separately presents new challenges and mistakes can be costly.
Here are important tips to keep in mind before you file your tax return this year:
Evaluate your filing status
What was your marital status on December 31? An individual’s tax filing status is used to determine several factors on the tax return, including the tax rate. An individual’s marital status on the last day of the tax year determines the filing status for that entire tax year. An individual will be considered divorced for the entire year if the divorce was finalized on or before December 31. A divorced individual can use the Single or Head of Household filing status for the tax year in which the divorce was finalized.
Taxpayers not legally divorced or separated on December 31 are considered married for that tax year and will have the option to file their tax returns as Married Filing Jointly, Married Filing Separately, or Head of Household. The Married Filing Jointly filing status will usually result in a lower overall tax bill, but if the thought of sitting down with an ex-spouse to sort out taxes sounds less than appealing, individuals can file Married Filing Separately or Head of Household. Filing as Head of Household may reduce the tax bite but to be eligible for that filing status an individual mut be unmarried or considered unmarried on the last day of the year. A person is considered unmarried if they paid more than half the cost of keeping up their home for the year, their spouse didn’t live in their home during the last six months of the year, their home was their child’s main home and they claim the child as a dependent.
Consider how to divide taxable income
If an individual has been filing a return jointly with their spouse since they were married, they reported all their income on the same tax return without having to determine what income belonged to each spouse. When divorcing, couples will need to figure out their income separately so that each spouse reports the proper amount of income.
Keep in mind that determining the proper allocation of income and deductions in the tax year a divorce is finalized or when a divorcing couple chooses to file separately might be dependent on the distribution laws of the state where the divorce decree was issued. Individuals in most community property states might be required to equally split all community income up to the date of the divorce decree. After the divorce has been finalized, all income from that date through the end of the tax year will likely be reported by the individual who earned it. Taxpayers divorcing in an equitable distribution state will probably report all income they earned individually, and any income received from property they personally own.
Determine who claims the dependents
The IRS only allows a child to be claimed as a dependent by one spouse, generally the custodial parent. A parent is the custodial parent if their child(ren) spent more time living with them than with their ex-spouse for the calendar year. However, a marital agreement can specify which parent can claim children as dependents, or the custodial parent can waive the right to take the credit. By claiming a dependent, individuals could be eligible for several federal tax breaks, including the child tax credit.
Review how overpayments will be treated
An often-overlooked aspect of divorce during tax season is how an overpayment can be allocated between spouses and how it will impact an individual’s current tax return. An overpayment on a taxpayer’s prior year tax return that has been applied to this year’s estimated tax payment and payments that have been made during the tax year can be allocated between spouses. While the IRS allows taxpayers to allocate these payments in any agreed upon manner, they also recommend attaching an explanation of the allocation to the tax return when it’s filed. Note that the distribution laws in your state may dictate the allocation. The payments will likely have to be allocated equally to each spouse if the divorce is in a community property state and the tax payments were made with community funds. The laws for equitable distribution states may require that any estimated tax payments are divided between spouses in proportion to each spouse’s separate tax liability.
Tax season can be intimidating for anyone. Navigating a tax filing while maneuvering through divorce can add complexity…and stress. The right team of advisors can help divorcing individuals through every step and empower them to file with confidence this tax season.
Please visit our Matrimonial and Divorce Advisory Solutions resource page for more timely divorce planning content.
This article is for general information only and is not intended as an offer or solicitation for the sale of any financial product, service or other professional advice. Wilmington Trust does not provide tax, legal, or accounting advice. Professional advice always requires consideration of individual circumstances.