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The Tax Consequences of Divorce

 

The Tax Consequences of Divorce

Roxanna Guinan
by Roxanna Guinan, Contributor

A couple considering terminating their marriage may not fully understand the tax consequences of doing so and should consider consulting both a tax professional and an attorney for divorce advice.  Couples who have no children will simply change the filing status on their income tax return after the divorce is final.  Couples with children, however, may be facing issues that are more complicated and may require professional divorce advice ― since custody and child support orders/agreements may have an impact on the each parent’s tax circumstances.

For couples in the process of divorcing, the marital status as of the last day of the tax year is an important consideration by the IRS in determining the tax amount attributable to each party and something that should be addressed when a couple is seeking divorce advice.  The IRS has established that “married persons” have the option of filing either as “married filing jointly” or “married filing separately.” For federal income tax purposes, “marriage” means only a legal union between a man and woman as husband and wife. Persons whose divorce has not yet been finalized by the end of the tax year qualify as “married persons” and enjoy some tax advantages. This is a valuable piece of divorce advice.

A couple who checks “married filing jointly” on their tax return, generally receives a higher level of exemptions, tax deductions, and tax credits. In dispensing divorce advice, a tax specialist or attorney will typically suggest that each spouse calculate their tax obligation individually as well as jointly before deciding which filing status to choose. A joint return may be filed by a not yet divorced couple, even if only one spouse had income during the year and both spouses must sign the return.

As a bit of divorce advice, keep in mind that although the exemptions, deductions, and credits may make filing jointly more financially appealing, both spouses can be held “jointly and individually” responsible for any tax, interest and/or penalty that is owed. Therefore, even if all the income was earned by one spouse, both spouses and each individual spouse could be responsible for any taxes due.  In addition, if one spouse owes taxes from a prior year, the other spouse could be responsible and any refund could be used to offset the back taxes due.  It is best to consult a professional for divorce advice regarding potential exemptions to the IRS rules.

If a couple is embroiled in a bitter divorce and there are concerns about one spouse’s financial or tax problems, an attorney may provide divorce advice that each spouse file separately to minimize the risks that one spouse may be financially harmed by another.   This method assures that each party is responsible for only for the accuracy and obligation of his/her filing even if the federal tax is higher, and there is no ability to claim certain credits and deductions, including a tax credit for child and dependent care expenses (in most cases) and the earned income tax credit.

If you are contemplating or are currently in the process of a divorce, make sure the divorce advice you seek out includes guidance on how the handle tax filing status.