Some Important Facts About Income Tax Filing and Divorce

Some Important Facts About Income Tax Filing and Divorce

March 2005
By Amy A. Stawski and Charles G. Goedert Are you recently divorced or contemplating divorce? If so, it's understandable if you feel intimidated about the income tax filing options that may be available to you and what the advantages and pitfalls are as a result of your filing decision. This is an important question that needs to be addressed and may prove to be quite trying, particularly if it needs to be answered during a time of anger, mistrust, hurt and hostility. Individuals contemplating divorce or those who have already filed should consider the options that are available to them. As a general rule: • The income tax rates are lower for individuals who file jointly as a married couple rather than as head of household • Filing as head of household results in lower tax rates than filing as a single person • Filing as single person results in lower tax rates than being married, but filing separately However, there are exceptions to this general rule. Therefore, an individual considering a divorce, in the midst of a divorce, or whose divorce became final last year, should understand some of the income tax filing aspects of the divorce. For tax filing purposes, your marital status is determined as of December 31. If your Judgment of Divorce was entered on or before December 31, you must file as a single individual for the entire year, regardless of how long you were married during the year. Your options at that point are to file as a single person or, if you qualify, as head of household. That is why many people nearing the end of their pending divorce action late in the year wait until after December 31 to enter the Judgment in order to take advantage of the lower income tax rates applicable to joint tax returns. When you file a joint return, however, you may be liable for your spouse's income tax problems. For example, if your spouse is self-employed or owns a business, you may not be sure about the legitimacy of your spouse's reported income or deductions. While there is an "innocent spouse" exception to protect you if you choose to file a joint tax return, it is neither automatic nor easy to qualify for that exception from personal liability attributed to your spouse's incorrect reporting. It is important to remember that if you were still married on December 31, lived in the same household with your spouse, and were not legally separated, then you must file either a joint tax return or as a married person filing separately. Therefore, if you are not sure of the legitimacy of your spouse's reported income or deductions, then you may want to consider filing a separate return to prevent taking on potential unknown tax liability. There is another IRS rule which may enable you to be considered unmarried for tax purposes. For this rule to apply, you must be legally separated on December 31, or your spouse must not have lived in your home for the last six months of the year. In this situation, even if you were still married on December 31, you may alternatively choose to file as head of household if: • You paid more than half of the cost of maintaining the home during the year • And you had a child or other qualifying individual living with you in the home for more than half of the year for whom you or your spouse is entitled to claim the tax dependency exemption. As you can see, there are many different income tax filing aspects that arise in divorce-related tax planning which will impact your tax rates. Make sure you address tax issues with your family law attorney and/or tax attorney as a part of your divorce process. Amy A. Stawski and Charles G. Goedert are both Members in the Firm's Bloomfield Hills office. Dickinson Wright's family and matrimonial law practice and probate and estate planning practice are dedicated to helping clients resolve disputes and plan their futures, focusing on the essential interrelationships between principals and the parties' legal rights and obligations. For additional information, please visit www.dickinsonwright.com.