A majority of married couples file their tax returns jointly, but what are your options when you are divorced or in the midst of getting divorced? If your divorce is final by the last day of the calendar year you can no longer file jointly. In that case, you must file either “single” or “head of household”. A head of household filing typically allows a party to be taxed at a lower rate, but you must meet the following criteria to claim head of household status: 1. you paid more than ½ of the cost of maintaining your home for the tax year, these expenses include mortgage, taxes, homeowners’ insurance, utilities and food eaten in the home, 2. your spouse did not live with you for the last 6 months of the tax year, 3. your home was the main home of your child, stepchild or eligible foster child for more than ½ of the year and 4. you could claim a dependent exemption for your child. If you file head of household your spouse must file married filing separately. Once you are divorced you can file head of household if you pay more than half of the costs of maintaining your home for the tax year and your children live with you more than half of the tax year.
If you are in the process of getting divorced, you may file jointly. However this should be agreed upon by the parties in advance and include consultation with both your accountant and your attorney. Oftentimes professionals advise clients to continue filing jointly because the tax burden is reduced; however this is dependent upon each party’s income, deductions and credits. The primary disadvantage to filing jointly is that now both parties are jointly and severally liable for any tax deficiencies, interest and penalties. Your Separation Agreement (or Judgment if your case is litigated and decided by a judge) should address how the parties deal with any tax refunds and/or liabilities. In the interim, the parties should enter into a stipulation (i.e. agreement) regarding tax indemnification. Such an indemnification agreement states that one spouse will be liable for any amounts due on previously filed joint returns and protects the spouse who didn’t prepare the return. While an indemnification agreement is helpful to the spouse not preparing the taxes, if that spouse has concerns about the other spouse’s ability to accurately prepare the tax returns s/he would be better off filing separately.
As for any available dependency exemptions, the Internal Revenue Service (“IRS”) presumes that the parent with primary custody of the child(ren) will claim the exemption for the dependent child(ren) on his/her tax return. However, most couples share the exemption by each claiming a child or children when there are more than one or alternating the years if there is only one child eligible. Before deciding if it makes sense to share the exemption equally, first it must be determined that the exemption is beneficial to both parties. For instance, a high earner may “phase out” from the benefit of the exemption while a low earner may derive no benefit from the availability of the exemption. Regardless of which parent has the dependency exemption, a parent that incurs medical expenses on behalf of the minor child is permitted to seek a deduction on their tax return for these expenses.
Divorces are difficult, both emotionally and financially, the team at Baker, Braverman and Barbadoro has attorneys available to guide you through all phases of a divorce case. – Lisa Bond.
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