Tax Ramifications of Divorce - Filing Status

There are four tax-filing statuses: Married filing jointly, married filing separately, head of household and single.  In this post, the effects of married filing jointly, married filing separately and filing as head of household are discussed.

Married filing jointly typically results in a lower combined tax. The parties will include all their income, exemptions, deductions and credits on the return. In order for the return to be considered a joint return, both spouses must sign the return. By signing the return, both spouses become jointly and individually liable for the taxes that are due – even if the income was earned only by one spouse. While parties may agree to allocate the liability for taxes between themselves as part of the divorce decree, it is important for each party to be mindful that their agreement is not binding on the Internal Revenue Service. Even if both parties agree, and the judge orders, that either the husband or wife will be 100% responsible for the entire tax liability, the IRS can still require that the other party pay the tax liability.

Married persons may also elect to file separate returns. In that case, each spouse will report his or her share of the community income, exemptions, deductions and credits on his or her individual return. If one spouse itemizes deductions, the other spouse must also itemize deductions (and not simply use the standard deduction). Each spouse is generally liable only for the taxes due on his or her own return. Filing separately typically results in a higher amount of taxes owed because certain deductions and exemptions are not available to married taxpayers who file separate returns.

Filing as head of household can give the taxpayer many more benefits than filing separately. This status allows the taxpayer to include certain credits, exemptions and deductions that are generally not available to an individual filing separately. Also, it usually provides for a lower tax rate than filing as “married filing separately.” However, in order to qualify for this filing status, the party must meet the following requirements: (1) be unmarried or “considered unmarried” on the last day of the year; (2) paid more than half the costs of keeping up a home for the year; and (3) had a “qualifying person” (i.e., child) live with the taxpayer for more than one-half of the year. For purposes of filing as head of household, a person is “considered unmarried” if his or her spouse did not live in the home during the last six months of the tax year; the home was the main home of the qualifying dependent for more than one-half the year; and the taxpayer can claim an exemption for the child. In addition, the taxpayer must file a separate return.

Tax Ramifications of Divorce

An individual taxpayer must elect from one of four tax-filing statuses when filing his or her return:

  • Married filing jointly;
  • Married filing separately;
  • Head of Household; or
  • Single.

To determine which status to elect, the individual taxpayer must look to the criteria set forth by the Internal Revenue Service. (See IRS Publication 504)

Which filing status an individual taxpayer is eligible to select is based, in part, on the individual taxpayer’s marital status on the last day of the year. If the individual taxpayer is married as of December 31st, then the individual taxpayer will be filing as Married filing jointly, Married filing separately, or possibly Head of Household. If the individual taxpayer is divorced as of December 31st, then the individual taxpayer will file as either Single or Head of Household. For federal tax purposes, a marriage means a legal union only between a man and a woman as husband and wife. IRS Publication 504.

A divorce court cannot require a party to file with a specific status. See Leftwich v. Leftwich, 442 A.2d 139 (D.C. App. 1982). However, the court can enforce an agreement between the parties to file with a specific status. See Johansen v. Johansen, 365 N.W.2d 859 (S.D. 1985). The court can also consider the impact that the filing status has on the marital estate in making a division of property. See Wadlow v. Wadlow, 200 N.J. Super. 372, 491 A.2d 757 (App. Div. 1985). If the parties initially filed a joint return, they can amend the return and file separately. However, if a party initially filed a separate return, he or she cannot amend the return and file jointly at a later date. In the absence of any agreements between the parties, each taxpayer will elect his or her filing status.

A Primer on Exemptions for Dependents

 In a recent Tax Court case, White v. Commissioner, the court summarized IRS requirements for claiming dependents. The taxpayer was divorced with two children. The children lived with the mother. The taxpayer paid his child support, paid for health insurance for the children and also made gifts to them. Because of these financial contributions, the taxpayer claimed exemptions for the two children.

The Tax Court summarized the law on exemptions:

Generally, a taxpayer is entitled to claim as a deduction an exemption amount for each of his or her dependents. The definition of a dependent includes a qualifying child or a qualifying relative. Pertinent here, a qualifying child is an individual who is a child of the taxpayer, shares the same principal place of abode as the taxpayer, has not attained the age of 19 or is a student and has not reached age 24 at the close of the calendar year, and has not provided over one-half of his own support.

(citations omitted). And what is a "qualifying relative?"

Turning to the definition of a qualifying relative, the individual must: (1) Bear a relationship to the taxpayer that is defined in section 152(d)(2); (2) have income less than the exemption amount; (3) have the taxpayer provide more than one-half of the individual's support for the year; and (4) not be a qualifying child of the taxpayer or any other taxpayer for the year.

See Section 152. Finally, the Court mentioned a special rule for children of divorced parents:

[A] noncustodial parent may treat a child as a qualifying child, notwithstanding the failure to satisfy the place of abode test of section 152(c)(1)(B), if the parents provided over one-half of the child's support, the parents are divorced, and the parents lived apart at all times during the last 6 months of the year. Section 152(e)(2) adds a requirement that "the noncustodial parent attaches to his/her income tax return for the year of the exemption a written declaration from the custodial parent stating that he/she will not claim the child as a dependent for the taxable year beginning in such calendar year."

 . . . The declaration must be made either on a completed Form 8332 or on a statement conforming to the substance of Form 8332.

Form 8332 requires a taxpayer to furnish: (1) The name of the child, (2) the specific years of release, (3) the signature of the custodial parent confirming his or her consent, (4) the Social Security number of the custodial parent, (5) the date of the custodial parent's signature, and (6) the name and the Social Security number of the noncustodial parent claiming the exemption.

(citations omitted).

Unfortunately for the taxpayer, he met none of the requirements to claim dependency exemptions for his children.