What Are the Tax Filing Options for Separated Couples?
Tax time can be a stressful situation for any individual. However, for separated couples comes additional considerations and unavoidable tax planning. The ultimate decision which must be made is whether the separated parties choose to file as married filing jointly, married filing separately, or have the added option of filing head of household. However, the decision regarding filing status cannot be made without properly weighing the advantages and disadvantages of each filing status. When making this decision it is imperative to talk with both your divorce attorney and your tax accountant.
Below is a summary of the pros and cons associated with each filing status, for the tax year ended Dec. 31, 2017. These can be used to start a discussion with your divorce attorney and/or tax advisor.
Married Filing Jointly
The Internal Revenue Service considers couples married for the entire tax year if no separation maintenance decree in entered by December 31. Therefore, even if the parties are living separate and apart for the majority of the tax year, they may choose to file married filing jointly if no final decree in divorce has been entered.
It is common knowledge that filing married filing jointly is the most advantageous filing status allowed by the IRS. This filing status has the most forgiving tax brackets, the highest standard deduction if the parties cannot itemize their deductions, and opens up the doors to every applicable tax credit. The combination of the above ultimately results in a lower aggregate tax liability.
Outside of continuing to be entangled as a married couple, the main disadvantage of filing married filing jointly, despite being separated, is that both parties would be joint and severally liable for any tax liability and/or penalties and interest for any tax underpayments. However, a party may be able to protect against this to some extent by executing an innocent spouse waiver. Furthermore, if the parties are in the process of executing a marriage settlement agreement, the parties can include language which addresses how refunds and liabilities would be shared between the parties.
Another disadvantage to consider when filing jointly involves the inclusion and deductibility of spousal support and alimony pendente lite. If a party is voluntarily paying spousal support or APL, there is no tax benefit to the payor and no tax burden upon the recipient. However, if the payor is subject to a court order, the spouse receiving spousal support or APL must treat the payments as income for federal tax purposes and the spouse paying the order may deduct the payments in arriving at adjusted gross income. Therefore, the payor spouse must weigh the consequences of filing jointly and foregoing the deduction of interim support obligations against filing separately with the deduction. This consideration has been eliminated by the Tax Cuts and Jobs Acts and will disallow any support deduction for the tax year beginning January 1, 2019.
Married Filing Separately
If the separation has been largely litigious and contentious, the parties may not be able to work together in preparing and signing the tax return, even if filing jointly results in the lowest aggregate tax liability.
The main advantage, which most separated spouses lean in favor of, is the continuity of being separate and apart in all aspects of life. Filing separately gives spouses this freedom as any tax liability or overpayment is the responsibility of the individual spouse, independent of their former spouse. Another advantage of filing separate is the option to amend a separate return. Parties are able to amend a married filing separate return to a married filing jointly return but do not have the option to do the inverse.
There are a few important disadvantages, outside of the unforgiving tax brackets, which are important to consider. For instance, if one spouse remains in the former marital residence and has made the associated real estate tax and mortgage payments, they will be able to itemize those deductions. However, if one spouse itemizes, the other spouse must itemize even if it is to their detriment. The parties must also split the $3,000 capital loss allowance with each spouse only able to deduct up to $1,500 of capital loses. Furthermore, the parties will lose the eligibility for both the earned income tax credit and higher education deductions.
Head of Household
If there are minor children of the marriage, the option of filing head of household may be considered. A party, despite being married, can filed head of household when all of the following are true:
- Your spouse did not live in your home during the last six months of the year;
- You paid more than half the costs of living in your main residence; and
- Your home was your main residence for more than half of the year and you are able to claim the exemption for a dependent child.
This option is available for each party if there are multiple children of the marriage. If the parties cannot agree to file jointly, each spouse may claim a respective child and file head of household. However, if there is only one minor child of the marriage, the spouse not filing head of household must file married filing separately.
The option to file head of household is very advantageous for a dependent spouse who has little to no income and would be forced to itemize under the married filing separate option as outlined above. This filing status has a larger standard deduction and more favorable tax brackets.
As previously mentioned, if the parties are in the process of executing a marriage settlement agreement, the agreement should contain language regarding which party may claim which child and during which years.
The most important consideration to take away from the aforementioned is to meet with your tax advisor and an experienced family law attorney well in advance of April 15. Your tax advisor will be able to determine the total aggregate tax due under each filing scenario. In most cases, the lowest tax liability with be pursuant to a married filing joint filing status. From there, the parties can weigh their individual advantages and disadvantages with their divorce counsel.
These complex financial considerations in divorce should be brought before the attention of an experience family law team such as the Pittsburgh divorce attorneys at Pollock Begg Komar Glasser & Vertz LLC. Fill out our online contact form or call us today to discuss your individual situation.
Ashley M. Majorsky is a candidate for Juris Doctor from the University of Pittsburgh School of Law in April 2018. She received her Bachelor of Science in accounting from Carlow University in 2011 and worked for the forensic accounting firm of Brabender Mascetta Pattison for four years before entering law school. She is a law clerk for Pollock Begg Komar Glasser & Vertz LLC, where she engages her accounting skills to prepare net income calculations and marital asset inventories. Ashley is a Certified Valuation Analyst, conferred by the National Association of Certified Valuation Analysts.