The Practical Guide to Filing Taxes While Awaiting Divorce
Joint or Separate? How to Deal with Taxes Before the Divorce Is Final
Shifting life circumstances always complicates tax time, and an impending divorce is no exception. If you are separated from your spouse but not yet officially divorced, you have some decisions to make prior to April 15. Here’s what you need to know regarding divorce and taxes.
Choosing a Filing Status
As long as you are still legally married as of December 31 of the year for which you are filing taxes, you can choose whether to file a joint return on to file as “married filing separately.”
The simple answer is tax breaks. With a joint return, you may qualify for credits that are simply not available to those filing separately, including the Earned Income Tax Credit, the Lifetime Learning Education Credit, and the Child and Dependent Care Tax Credit. Filing jointly will get you a higher standard deduction, a higher IRA contribution, and a higher capital loss deduction limit.
If you file separately, there can be a few disadvantages. You cannot claim education tax credits – even student loan interest deductions. Only one parent can claim your children as dependents to benefit from the child tax credit. (Typically, the custodial parent is the one with whom the children lived with more than 50 percent of the year.) On top of all this, you will likely have a higher tax rate.
So why would anyone choose to file as “married filing separately”? There are a few good reasons:
- Your spouse owes money for child support payments, back taxes, or student loans, which could be taken from your refund.
- You do not trust that your spouse is filing their taxes honestly and want to protect yourself from audits and penalties.
- You only want to be responsible for your personal tax liabilities and not your spouse’s.
- You can claim a larger amount for particular deductions, such as medical, based on your annual gross income (AG1) versus if you filed jointly.
How to Decide
If you believe your spouse is cheating on their taxes or you will be on the hook for their debts, it will not be difficult to decide to file separately. However, if the choice doesn’t feel clear-cut, consider these options:
- For those with fairly simple taxes (and a friendly relationship with your ex), use an online filing service to file under both statuses and compare the outcomes — before actually filing of course. Then choose the option that is the most financially beneficial.
- If your situation is more complex, take your questions to a tax professional. They can explain the pros and cons of each approach and run the numbers.
What About Next Year — and the Year After That?
As you work through the details of your separation agreement, it’s crucial to think through future tax implications as well. At South Bay Mediation, we have worked with more than 500 clients and can help you consider how the decisions you and your ex make about your separation will affect your future. We can advise you on when it’s time to consult with a CPA, financial planner, or tax attorney as well. Contact South Bay Mediation to set up a call to learn more today.