“Should auld acquaintance be forgot, and never brought to mind?”
While most people associate these words with revelers ringing in a new year, if you’re in the midst of a divorce or separation, it might be an important question for your accountant.
The IRS puts a great deal of weight on December 31st. It considers a couple married for the entire tax year if they don’t have a decree of separation by that date. Even if you have an understanding with your former partner and you have lived separately since January 1st, you are still considered married in the eyes of the law if you don’t have a formal separation maintenance decree by the end of the year.
It may seem obvious—or even trivial—so why does this matter? Well, that official status determines the options you have for filing your tax return. And that in turn can have a huge impact on you financially and emotionally. Let’s unpack:
IRS Filing Options
When you file your tax return, there are only a handful of options to choose for your filing status. You can declare: “head of household,” “married filing jointly,” “married filing separately,” “qualified widow(er),” or “single.” That’s it.
If you are married (officially), the IRS limits your filing status options to “married filing jointly” or “married filing separately.” You may not file as “head of household” or “single.”
If you are separated (officially), the IRS limits your filing status options to “head of household” or “single.” You may not file as “married filing jointly” or “married filing separately.”
As with most things with the IRS, it’s pretty cut and dried. These are your options. Now let’s look at the implications:
Married Filing Jointly
This is the tax option that many couples choose during their marriage, as it offers a number of tax advantages. For example, the standard deduction in tax year 2020 for married couples filing jointly was $24,800. For single filers in the same year, that deduction was $12,400.
At first blush, it may appear those deductions are equal (two single filers at $12,400 equaling one couple at $24,800). However, if you and your partner earn different incomes—or if one of you is a stay-at-home parent and doesn’t earn any income at all—the combined deduction can make a big difference.
For that reason, some separated couples elect to delay an official separation decree because staying legally married gives them a tax break. However, there is one very important caveat—and perhaps why your accountant might be asking you if auld acquaintances should be forgotten: couples filing jointly are responsible for all taxes due by both partners, including penalties and interest. That means if your former partner fails to pay their taxes, you’re on the hook with the IRS.
Married Filing Separately
The other filing option you have if you are still legally married on December 31st is to choose “married filing separately.” There are some restrictions with this option, but it eliminates the liability of filing jointly. For many couples—especially those that are going through an acrimonious separation—eliminating that risk is worth the restrictions.
Some of the restrictions with this option include losing the ability to claim earned income or higher education tax credits. You and your partner also have to agree to both itemize or both take the standard deduction—you must both do the same. If you itemize, you must limit your deductions to only what you paid as individuals (for expenses like property taxes and mortgage interest).
“Married filing separately” may cost you more in taxes, but it assures that you cannot end up liable for your partner’s taxes, penalties, interest, or legal jeopardy from intentional misrepresentations or dishonesty.
Head Of Household
If you decide to secure a decree of separation before December 31st, you can choose to file as “single”—as you probably did before getting married—or you may be able to file as “head of household.” This option has a number of qualifications, but if you are eligible, it offers many advantages (like being able to claim a standard deduction of $18,650 in tax year 2020, versus $12,400 if you file as “single”).
In order to file “head of household,” you must have at least one dependent. Usually this is a child or children, but it can also be a parent or someone else that you take care of (and is “dependent” on you). To be eligible, no one else can also claim this person as their dependent, and you must pay at least half the expenses to maintain your dependent’s home.
You also must be officially unmarried, with an exception where you may file “head of household” if you and your partner stopped living together before the final six months of the tax year and you paid more than 50% of the costs of maintaining your home for the year. You must also file a separate tax return from your partner.
There are many complex factors that go into separating from a partner. Agreeing on a plan for child custody is always a top priority, as is resolving ownership of assets like a home and investments. Tax status is something that should also be addressed, because it will have an impact on you financially and emotionally.
Luckily, the IRS is clear on your options. You simply must decide which one is best for you and your family—and act before December 31st! To further discuss your tax options and what you must do to legally separate before the end of the year, please contact us at SouthBay Mediation. We love helping clients move forward and reach resolution, so they can ring in their year with new hope and new happiness.