How Do I File My Taxes If I Am Separated But Not Divorced? (Part II)

On behalf of The Marks Law Firm, L.L.C. posted in Divorce and Taxes on Friday, January 17, 2014

In our previous post, we discussed the tax implications of filing while separated but before entry of a final decree of dissolution, focusing mostly on the choice of status and the ability to claim the children as dependents.  In this post, we continue that discussion by looking at other common deductions and suggest how to avoid the pitfalls in tax purgatory.

After the children, the most valuable tax deduction tends to be for interest on a home mortgage.  If the parties have one house and one party moved into an apartment, the parties have only one household to claim for deduction.  Again, as with the children, only one party can claim the house.  If the mortgage is in only one person’s name, that person has the legal right to claim the house (the only legal claim).  If the mortgage is jointly titled, each spouse has an equal claim.  At this point, the smartest move would be to determine which spouse would gain more by claiming the mortgage.  If the parties have two separate households with mortgages, given that an individual can claim only one household, it would make the most sense in this situation for each spouse to claim one house.

Another valuable deduction at issue is property tax, and again it follows ownership like the mortgage, with similar results.

At this point some of you may interject, “But wait, I paid the mortgage and taxes during the tax year because the court told me to in an order.  Shouldn’t I get to claim what I paid?”  An excellent question, but unfortunately the mortgage follows not the person who paid but the chain of title.  If the court ordered you to pay the mortgage on a house you cannot claim, you lose for filing purposes the right to the deduction.  However, the amount you lost could be considered in the final division of property, so you would want to raise that issue through your attorney.

What about contributions to an IRA?  Generally, ownership determines the claim.  An individual contribution up to $5,000 may be claimed.  Again, if your income went into a spouse’s IRA, you cannot claim both your IRA and her IRA, but you can raise this as a distribution issue for final judgment.

What about health care expenses?  The IRS reports that health care expenses are the second highest deduction after mortgage interest.  Usually, health care expenses go with the person paying the expenses, whether individually or for a dependent, even if you cannot always claim that dependent.  But again, spouses cannot claim the same expense; to avoid an audit, spouses need to determine how to divide up different expenses and should consider who would benefit most by claiming those expenses.

Many spouses also file as self-employed, which brings into play a whole host of business deductions.  Where some of these deductions could overlap with the other spouse (perhaps a home office or a car used for business), the parties need to coordinate to avoid an audit.

It becomes painfully clear that without clear coordination between the spouses and open access to all financial records, each party risks at minimum losing key tax advantages and at worst filing an incorrect tax return that could trigger an audit, fines or even a criminal investigation.

So how could that coordination happen?  If the parties cannot work it out themselves, they will need to have their attorneys involved.  However, the most important person in this situation is really an accountant who can run the numbers on filing jointly or separately for each person and determine which combination would result in the least amount of tax.  The accountant can consider different scenarios related to the various deductions, and recommend the best way to file to maximize a refund or minimize a tax debt.  Given that any refund or obligation will become marital property subject to division, following the accountant’s recommendation seems the soundest course of action and avoids the dangers of trying to fool the other spouse or the federal government.

With couples who have high collective wealth or with one spouse who has high wealth individually, much income may run through trusts and various tax shelters.  We cannot possibly dissect all of the consequences of those arrangements in this space, but we can state some key points.  First, if the trust contains what the law considers marital property, the court will take an interest in the tax consequences of the trust.  Second, trying to hide marital income through a secret account or trust not disclosed to the other party constitutes fraud and could put you in a world of hurt if subsequently discovered.  Third, any financial planners whom the parties have used would be subject to discovery.

Tax season creates enough headaches without the added stress of divorce.  The safest and most sensible course is to work together as a team and get the most out of an annual return by minimizing the marital tax burden.  Persons who choose to go it alone or try to hide assets do so at their own risk – in terms of an audit, an unequal distribution of property at the time of the final dissolution of marriage, and even a fraud claim for hidden assets discovered after the entry of divorce.

If you have questions about filing taxes prior to the final entry of divorce, contact our St. Louis divorce attorneys – we can help.

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