Divorce and Taxes - Common Questions
We are fast approaching the April 18th tax filing deadline and, around this time of year, we usually have to answer some common questions from our divorcing clients. Here’s a quick FAQ of the issues we get asked about most often.
Q: Can I file separately if my divorce isn’t final?
A: Your tax filing status depends on whether you were legally married, separated or divorced on the last day of the tax year in question. So, for your 2021 tax return, were you married, separated or divorced on December 31, 2021?
If you were married, you can either file as (a) married filing jointly, (b) married filing separately, or (c) head of household if you meet the following criteria: (1) you did not live with your spouse during the last six months of the year, (2) you paid for more than half of the household expenses during the year, and (3) your child lived in your home with you for more than half of the year.
You can file as “Single” only if, on the last day of the year, you were (1) legally divorced (you have a signed judgment of divorce from the court), or (2) legally separated pursuant to a validly executed separation agreement.
If you do not qualify as “Single,” you should do your best to have your tax accountant run proforma tax returns for each of the other filing statuses to understand which filing status is the most tax advantageous. To do this, though, you will need to provide your accountant with your spouse’s tax documents.
Q: Which parent can claim our child(ren) as dependents?
A: The general rule is that a qualifying child (See IRS Publication 504 for definition) of divorced or separated parents is the dependent of the custodial parent. In the eyes of the IRS, the custodial parent is the parent with whom the child lived for the greater number of nights during the year. That said, the noncustodial parent may claim a qualifying child as a dependent if (1) the child received over half of his or her support for the year from one or both parents, (2) was in fact in the custody of one or both parents for more than half of the year, and (3) the custodial parent provides a signed IRS Form 8832 to the noncustodial parent, which must be attached to the noncustodial parent’s tax return.
The issue of claiming your children as dependents on your tax return should be negotiated as part of your divorce settlement agreement, or ordered by your judge after a trial. Often, parents will alternate the dependency exemptions each year, or if there is more than one child, the exemptions can be split between the parents. Included in your divorce agreement should be a requirement that the custodial parent agree to turn over a signed form 8832 in those tax years when the noncustodial parent will claim the child as a dependent.
Q: Who is entitled to the refund?
A: If the refund is received from a return filed jointly, then it is marital property and should be distributed equitably between spouses. Equitable distribution does not necessarily mean equal distribution, and often if the parties are otherwise managing their finances separately, the fair method of dividing the return is to do so proportionately, according to each parties’ reported income.
Q: Who is responsible for the tax liability?
A: If you are divorced, you are jointly and severally liable for any tax, interest, and penalties due on a joint return for a tax year ending before your divorce. This responsibility applies even if your divorce decree states that your former spouse will be responsible for any amounts due on previously filed joint returns.
In some cases, a spouse may be entitled to Innocent Spouse Relief, which is relief of the tax, interest, and penalties on a joint return, no matter how small the liability. To qualify for innocent spouse relief, you must meet the following requirements:
You filed a joint return and underpaid the appropriate amount of tax due to errors or omissions by your spouse (or former spouse);
You establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an understatement of tax;
Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.
You and your spouse (or former spouse) have not transferred property to one another as part of a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.
Let us know if you need assistance with peeling back the layers on your rights to claim your child as a dependent on your tax return. For some taxpayers, the implications and tax savings can be significant. We are happy to offer a free consultation to see how we can help you.