They say that there are only two things for certain in life: death and taxes. Well, maybe more like tax questions. This year, even taxes have taken a back seat to COVID-19, as the federal tax deadline has been extended to July 15th. Many states have extended their tax filings as well. Have you decided to wait to file your tax return as a result?
Taxes present unique challenges for divorced and/or separated persons. You may be saying, Liz, challenges for divorced people? What else is new? I know, I know. However, the failure to answer these divorce tax questions correctly could cost you big bucks. So what are they? In particular, I find that I am constantly asking (and answering) these three divorce tax questions each tax season:
- What is your tax filing status?
- Who are claiming your children as dependents?
- Is your alimony check taxable or tax deductible?
Even if you have already filed your taxes for this year, you’ll want to read on, and then bookmark this article for 2020.
Divorce Tax Questions #1: What is your tax filing status?
Failure to claim the right tax filing status is probably the biggest error that I see separated people make on their tax returns. Actually, it is so prevalent I’m surprised that more people don’t get audited for it by the IRS.
There are four tax filing statuses: single, married filing jointly, married filing separately, and head of household. So, how do you answer this tax question and pick the right filing status for you? Think of it this way: Whatever your marital status is as of December 31st (i.e. the last day) of the tax year determines your filing status.
Want a real life example?
Bob and Sue get divorced on November 22, 2019. Therefore, they are not married to each other (or anyone else) as of December 31, 2019. As such they can not filed a tax return as a married couple because they are, you know, not married.
Okay that was an easy example to answer this tax question. Let’s try a harder one. And the one that I see the most.
Bob and Sue decide they want a divorce on November 22, 2019 and consider themselves separated. However, they are still legally married as of December 31, 2019. Does being separated as of December 31, 2019 allow you to file single on your tax return?
NO!!! You are still married. Therefore, single is not a tax filing status that you can use, because you are, you know, not single!
While this may seem like a no-brainer to some, I actually see a lot of clients get the answer to this tax question wrong and file their taxes as a single person. Perhaps it isn’t caught because their spouse does the same. Regardless, it isn’t correct and creates a potential tax problem that you don’t want.
When you are married, your tax filing options are head of household (if you can meet certain requirements), married filing jointly or married filing separately. Choosing whether to continue to file joint tax returns with an estranged spouse or to file your tax return separately is a strategic question that you should discuss with your accountant, lawyer or financial advisor. Start working on your taxes early so that you have time to discuss with your advisors and make a decision about the best tax filing status for you and your divorce case.
Divorce Tax Questions #2:Who are claiming your children as dependents?
If claiming the wrong tax filing status is the biggest error that I see, who claims the children as dependents may be the biggest tax question that I see divorced couples fight over. Why? because they don’t understand the rules regarding claiming children as dependents when you are divorced.
Remember, only one parent can claim a child as a dependent at a time. While the dependency exemption was eliminated in that Tax Cut and Jobs Act of 2017, there are still certain credits available to the parent that claims a child as a dependent on their tax return.
So how do you answer this divorce tax question? The IRS has created some guidelines to help divorced parents deal with this tax question. Under those rules, the person who has primary custody of the children is the parent who can claim the children on their tax returns. If the parties have shared (50/50) custody, then the person who can claim the children is whichever parent has the higher adjusted gross income (AGI).
However, parents can agree to an alternate arrangement regarding who gets to claim the kids. In general, I see parents agree to split the dependency exemptions evenly or alternate if there is an odd number of children. This agreement is usually confirmed in a Property Settlement Agreement or child support order.
So what do you do if you and your co-parent agree to divide the dependencies but your co-parent violates this agreement and claims all or the wrong children? Or what if you have never discussed this issue before and both of you claim the same kids?
First, before a tax return is accepted, the IRS scans for duplicate claims of children via their social security numbers. So, if you file your taxes after your co-parent and he or she has claimed the same children as you, your return will not be accepted. You will then have to either send in your return via mail, or contact your co-parent to get them to amend their return to remove the wrong children so that you can then refile your return.
Sounds like a mess? It is. Therefore, it is really important that you and your co-parent discuss who is going to claim which children well before tax season starts and get that agreement in writing.
Why is having an agreement on who is claiming the children so important?
You don’t want to run out of time and be forced to incur late fees and interest because you delayed filing your return to fix/determine who is going to claim the children. Or, perhaps worse, you pay more in taxes than you should because you were forced to give upon on the situation to get your taxes filed on time.
How can a written agreement on dependencies help you with this tax question?
Having a clear written agreement on which parent claims which child will alleviate many of these issues. Most people will abide by an agreement, particularly if it is made a court order. Also, some people just simply forget which kid they are supposed to claim, resulting in an honest error. Having it written down to remind them helps to avoid that confusion.
What can you do if your co-parent violates the agreement?
If the other parent violates the dependency agreement, you can address their violation with family court. Notice I said family court and not the IRS. The IRS will not arbitrate this dispute for you. This can be frustrating because it may result in your tax return being delayed or filed without the right dependencies. This is why you need to deal with this issue well before the tax filing deadline. Doing so will allow you to address the dispute ASAP without delaying your return or having to file an amendment, both moves which cost money.
Divorce Tax Questions #3: Is your alimony taxable?
If you pay alimony or receive alimony, you are going to want to pay close attention to the answer to this tax question. Prior to 2018, this tax question was a no brainer. Now, it takes a little bit more inquiry. Why?
In the Tax Cuts and Jobs Act of 2017, the tax code section about alimony was changed. Big time. Therefore now any alimony awards made after December 31, 2018 will not be considered taxable income to the person receiving the money or tax deductible to the person paying alimony. Let me answer this divorce tax question by bringing back Bob and Sue.
Example #1: Bob and Sue get divorced in 2019.
Bob and Sue are getting divorced. As part of their agreement to divide up their marital property, they agree that Sue will pay Bob alimony of $1,000 per month. They sign this agreement in February of 2019 and get divorced in March 2019. Bob’s alimony is not taxable income to him because the agreement was signed and the parties were divorced after December 31, 2018.
Example #2: Bob and Sue get divorced in 2012.
Let me use that example again to answer this divorce tax question but with different dates. Let’s say Bob and Sue made this agreement in 2012 and got divorced in 2013. Is that alimony award still taxable income to Bob on his 2019 tax return? Yes. Why? Because the agreement was made and the parties were divorced before December 31, 2018.
Do you claim your alimony on your tax return? If you do, it is important that you and your former spouse claim the same amount! This is also a common reason that tax returns are rejected or audited. Again, communicate with your former spouse about the number to avoid this issue, particularly if a payment straddled the end of the year and you aren’t sure which year your former spouse is counting it for.
Final tips for answering the three most important tax questions for divorced persons
Are you ready to answer these divorce tax questions for yourself? In doing so, keep these tips in mind:
- Make sure that you are using the appropriate tax filing category to reflect your actual marital status;
- Speak to an accountant and/or your former spouse if you are considering filing a joint tax return while separated;
- Clarify who is claiming which children on your tax returns and/or make sure that this is included in a written agreement to avoid future confusion;
- Understand the new rules regarding alimony and, if you still claim it on your taxes, make sure that you and your former spouse are using the same payment number to avoid audit.
And always, if you are worried about how any of these divorce tax questions apply to your specific situation, please seek out the help of a divorce lawyer or accountant where you live to help you! It is money well spent!
What’s next on the Divorce Lawyer Life?
Got debt? Most of us do. But do you know how to deal with it in a divorce case? What debt is marital and what debt isn’t? How should you divide up debt? I’ll answer these questions next week.
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