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

On behalf of The Marks Law Firm, L.L.C. posted in Divorce and Taxes on Wednesday, January 15, 2014

It is the New Year and therefore the beginning of…tax season.  While all of us generally dread doing our taxes, for individuals who have started the process of getting a divorce but have not received a final judgment, they feel even more stressed and confused, as if left in some sort of tax purgatory.  How do I file?  What can I claim?  How can I get all of my records?

At the outset, we should note that when filing tax returns, any refund prior to a final divorce decree is marital property subject to division, and any taxes owed prior to a final divorce decree are marital debt subject to allocation.  The logical path would be to seek out a filing strategy that is a “win-win” for both parties, maximizing the overall refund and minimizing any tax burden.  Unfortunately, during a divorce following the logical path can be a challenge, so we offer some guidance on the most commonly asked questions.  But remember – even if you think you have “gamed” the system somehow, because the records are discoverable and reviewable by the court, any windfall in the short term may disappear at the time of final judgment, as the court can divide that windfall and award a marital share to the other spouse – or even a greater share if the court finds any type of misconduct.

The Internal Revenue Code (IRC) allows for different types of filing status – married filing jointly, married filing separately and single.  As many of you may be aware, your status carries different tax advantages and disadvantages.  Generally, married filing jointly receives an overall lower tax burden than married filing separately.  Filing as a single (if allowed under the Code) could be more or less advantageous depending upon income level and deductions.

Further complicating the status issue is where the children live and for how long.  Claiming a child as a dependent allows a parent to reduce taxable income by several thousand dollars depending upon income level.  However, a child may be claimed on only one return – by both parents if filing jointly, but by only one parent if filing separately.  If both parents attempt to claim the child, the one who files first will receive the exemption, and the other parent will be unable to claim the child electronically and will trigger an audit if claimed in a paper filing.  Given that no one likes an audit, parents need to coordinate who will claim the children for a given tax year (noting also that the Code limits the ability of certain individuals to claim a child based on residential time, so a waiver may need to be executed).  Once the court enters a final judgment dissolving the marriage, the parties will have clear guidance on claiming the children; until that time, the parties need to determine how to make this aspect work.

Closely associated with the children is the dependent care credit or earned income tax credit which allows a deduction for childcare payments.  In order to claim the credit, the party must have paid the expenses and also have the right to claim the child as a dependent.  Often during separation, one party may remain in the marital home with the children and could claim them as dependents, while the other party paid all the childcare expenses but could not claim the children as dependents.  On a joint return, this is not a problem, but if the parties are filing separately, this becomes a serious issue, as the parties risk losing the credit entirely if they do not work out a way to match the dependent claim with the party paying for childcare.  The parties also risk an audit if one claims credit when payment was not actually made.

As you can see just by discussing claiming the child as a dependent, filing status becomes a highly determinative factor in calculating household tax burden (in a joint filing) and individual tax burdens (in separate filings).  An accountant can determine outcomes based on different filing scenarios, and the rational choice would be to choose the one that yields the greatest overall benefit to the marital tax burden.  Getting to that rational choice, however, can be challenging in high conflict divorces or high asset divorces where so many other financial issues factor into the equation and the temptation to hide certain financial facts may be higher.

In our next post we will discuss other common deduction issues and ways to find resolution to what could be a tax nightmare.

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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