People who are in the process of divorce are still considered married for tax purposes. This article provides the five categories for individuals filing their annual tax returns. It also explains the situations a marriage is considered terminated for tax purposes. As you know, in some divorce situations, a spouse may be reluctant to file a joint return due to the liability. And in some cases, completing the divorce may save taxes.
*Author’s note: This article has been created as an easy reference for attorneys to review with their clients, especially during this time of year as the tax filing deadline approaches.
A divorced or divorcing couple's tax filing status is determined as of the last day of a tax year. A couple in the process of divorce may find that they are still considered married for tax purposes even though they do not live in the same household.
There are five federal tax filing categories for individuals:
1. A married individual can file jointly with his or her spouse. Note: Both spouses generally must sign the return, or it will not be considered a joint return.
2. A married person can alternatively file a separate return from his or her spouse.
3. A qualified individual can file as a head of household.
4. A person can file as a widow or widower.
5. An unmarried individual generally files as a single person, but if certain criteria are met, he or she may qualify for head-of- household status or as a qualifying widow or widower.
What if you are in the process of a divorce? What if your spouse has abandoned you?
A couple remains married for tax purposes until:
• A final decree of divorce is issued by a domestic relations court;
• A domestic relations court issues a final decree constituting a legal separation under local law, requiring the couple to live apart; or
• The "abandoned spouse" rule applies.
Individuals may be able to file as a head of household if they are considered to be abandoned by their spouse. An individual is required to live apart from his or her spouse for the entire last six months of the tax year to achieve abandoned spouse status.
In some divorce situations, if the abandoned spouse rule does not apply, a spouse may be reluctant to file a joint return due to the "joint and several tax liability" resulting from joint returns. This means both spouses may be held responsible, jointly and individually, for the tax and any interest or penalty due on your joint return. One spouse may be held liable for all the tax due even if all the income was earned by the other spouse.
Accordingly, in situations in which the abandoned spouse rule cannot be met but a spouse is reluctant to file a joint return, one option is for the spouse to file under the status of married filing separately, then wait to determine if any instances of concern regarding joint and several tax liability arise, and then elect to file an amended joint return within three years of the original due date of the separately filed returns.
An amended return can be filed under joint return status where separate returns had originally been filed. However, the amended return must be filed within three years of the original due date, excluding extensions, of the separate returns.
An individual who has not received either a decree of divorce or separate maintenance from a court as of the last day of a tax year, and who fails to qualify as an abandoned spouse, is considered married for tax purposes. The taxpayer must therefore file a joint return or file as married filing separate.
The potential tax savings from delaying a divorce to file a joint return may not justify the additional liability exposure created by the joint filing. In some instances, completing the divorce and terminating the marriage may save income taxes.
Once a marriage is terminated for tax purposes, the former spouses are no longer eligible to file a joint income tax return for that year. The individuals are then faced with the problem of dividing income and deductions on the divorce-year return. Also, special issues arise for allocating mortgage interest and taxes in divorce situations. Finally, the rules governing the reporting of income and deductions differ significantly between community property and equitable distribution states.
Partnering with a CPA will give your client an advantage during the divorce process. For more information on how we can help contact William Allen, CPA/ABV, CFE at Brisbane Consulting Group.
WILLIAM P. ALLEN, CPA/ABV, CFE
Bill is a member of the American Institute of Certified Public Accountants accredited in Business Valuations (ABV); a Certified Fraud Examiner (CFE) accredited by the Association of Certified Fraud Examiners; and the New York State Society of Certified Public Accountants. He has more than 5 years' experience in public accounting serving both commercial businesses and nonprofit organizations. As a member of the Brisbane team, Bill is responsible for valuation, forensic accounting, and litigation support services. Bill is a graduate of Le Moyne College and has worked with our Firm since graduating in 2006.