Filing status can be particularly problematic for parties who are separated, but not yet divorced. Generally speaking, the most favorable tax rates will apply to returns filed as “Married, Filing Jointly.” Even though filing that way may produce the lowest overall total tax liability for the two parties combined, it is not necessarily best for each of the parties individually. Each party will want to look carefully at what is best for him or her before deciding how to file.
If the parties file separately, the big issues to be determined are likely to involve deductions and exemptions, and these are best worked-out between the parties and/or their attorneys in advance of either party filing a return. Although there are IRS rules and regulations for things like which parent may claim dependent children, they are really “tie-breaker” rules. The parties may agree to a different arrangement, or the court may order the parties to file in a way that does not follow the IRS tie-breaker rule. As long as both parents do not claim the same child, the IRS will not be concerned with the court order, nor will the IRS disturb the agreement of the parties. IRS problems will arise, however, if the parties file separately and both try to claim the same dependency exemption, so it is best to have these things worked out, by agreement or by order of the court, before filing. The same is true for things like mortgage interest deductions, which is another common issue that comes-up when parties file separately. Additionally, separately filed returns must use the same filing method with regard to itemizing deductions or using the standard deductions.
Just as divorcing parties filing separate returns are likely to have certain issues to work out before filing, divorcing parties who elect to file a joint return will need to work out their relative contributions to the joint tax liability, as well as what they will do with any refund received. Then too, unless special circumstances can be established after the fact, parties filing jointly are each taking full responsibility for the joint tax obligation and for the information on the return. Often divorcing parties object to taking-on that sort of joint responsibility, although sometimes that objection can be overcome by way of an agreement or stipulated court order setting forth each party’s responsibility vis-a-vis the other party in the event an IRS problem should arise from their jointly-filed return.
The tax consequences arising from payment and receipt of child support, spousal support, and/or alimony pendente lite are fairly straight-forward, but the specific language and allocation of the amount paid set forth in the order under which the payments are made is important to those consequences. As long as the language in the order correctly allocates the funds being paid, child support is not a deductible expense for the one paying it, and it does not cont as taxable income to the recipient. Spousal support or alimony pendente lite, however, is deductible to the payor and must be included in the taxable income of the recipient.
The tax consequences of a final divorce settlement or a court’s final award in equitable distribution incident to a divorce are subject to a subsequent entry in this newsletter space, but whether separated and in the process of divorce, or as a part of a final divorce settlement/award, each party should be sure to consult an independent tax advisor for information and advice.
To schedule an appointment with one of our attorneys or for further information, call us at the Law Office of Gregory P. LaMonaca, P.C., at (610) 892-3877.