- Learn how separated taxpayers can file.
- Find out how to file as a divorced taxpayer.
- Discover the tax changes in store for recently married taxpayers.
- Learn about the tax rules for widowed taxpayers.
- Find information regarding filing statuses for each of the above situations.
- Learn about joint and several liability.
- Discover the rules regarding who claims the children.
- Learn how to treat alimony for tax purposes.
- Find out which states are community property states.
- Find out how the Affordable Care Act can affect your taxes.
A tax filing status change because of a life event such as marriage, divorce, separation, or the death of a spouse frequently blindsides taxpayers. These occasions can be stressful or ecstatic times. The last thing most people will be thinking about is the tax ramifications. But real ramifications exist, and you should consider them to avoid unpleasant surprises. The following are some of the significant tax complications for each situation.
Tax Filing Status Change #1: Separated
Separating from a spouse is probably the most complicated life event and certainly stressful for the family involved. For taxes, a separated couple can file jointly, because they are still married, or file separately.
Filing Status
If the couple has lived apart from each other for the last 6 months of the year, either or both of them can file as head of household (HH) provided that the spouse(s) claiming HH status paid over half the cost of maintaining a household for a dependent child, stepchild or foster child.
A spouse not qualifying for HH status must file as a married person filing separately if the couple chooses not to file a joint return. The married filing separate status is subject to a host of restrictions. These restrictions keep married couples from filing separately to take unintended advantage of the tax laws.
In most cases, a joint return results in less tax than two returns filed as married separately. However, when married taxpayers file joint returns, the responsibility for the tax on that return lies with both spouses. We refer to this as joint and several liability. What this means is that one spouse may be held liable for all of the tax due on a return, even if the other spouse earned all of the income on that return. This holds even if the couple later divorces.
So, when deciding whether to file a joint return or separate returns, separated taxpayers possibly on the path to a divorce should consider the risk of potential future tax liability on any joint returns they file.
Children
Who claims the children can be a contentious issue between separated spouses. If they cannot agree, the one with custody for the greater part of the year claims the child as a dependent along with all of the associated tax benefits. When determining who had custody for the greater part of the year, the IRS goes by the number of nights the child spent at each parent’s home and ignores the actual hours spent there in a day.
Alimony
Alimony is the term for payments made by one spouse to the other spouse for the support of the latter spouse. Under tax law before payment tax reform, the recipient of the alimony includes it as income, and the payer deducts it as an above-the-line expense, on their respective separate returns.
The tax reform rule is that alimony is non-taxable to the recipient if it is received from divorce agreements entered into after December 31, 2018, or pre-existing agreements that are modified after that date to treat alimony as non-taxable. Therefore, the recipient of alimony with a post-2018 agreement cannot treat it as earned income for purposes of an IRA contribution. The payer also cannot deduct the alimony.
Payment for the support of children is not alimony. To be treated as alimony by separated spouses, the payments must be designated and required in a written separation agreement. Voluntary payments do not count as alimony.
Community Property
Nine U.S. states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin – are community property states. Generally, community income must be split 50–50 between spouses according to their resident state’s community property law. This often complicates the allocation of income between spouses, and they generally cannot file based on just their income.
Tax Filing Status Change #2: Divorced
Once a couple legally divorces, tax issues become clearer. Each former spouse will file based on their income and the terms of the divorce decree related to spousal support, custody of children, and division of property.
Filing Status
An individual’s marital status as of the last day of the year determines the filing status for that year. So, if a couple divorces during the year, they can no longer file together on a joint return for that year or future years. They must, unless remarried, either file as single or head of household (HH).
To file as HH, an unmarried individual must have paid over half the cost of maintaining a household for a dependent child or dependent relative who also lived in the home for more than half the year (exception: a dependent parent need not live in their child’s home for the child to qualify for HH status). If both ex-spouses meet the requirements, then both can file as head of household.
Children
Normally, the divorce agreement will specify which parent is the custodial parent. Tax law specifies that the custodial parent claims the child’s dependency and associated tax benefits. However, the custodial parent can release the dependency to the other parent in writing. The IRS provides Form 8332 for this purpose. The custodial parent can grant the release for one year or multiple years. They can also revoke the release. The revocation becomes effective in the tax year after the year the revocation is made.
Family courts often award joint custody to the parents. In that case, if the parents cannot agree on which of them will claim a child as a tax dependent, then the IRS’s tie-breaker rule will apply.
This rule specifies that the one with custody for the greater part of the year, measured by the number of nights spent in each parent’s home, claims the child as a dependent. The parent claiming the dependency is also eligible to take advantage of other tax benefits, such as childcare and higher education tuition credits.
Alimony
See alimony under “separated”.
Tax Filing Status Change #3: Recently Married
When a couple marries, they combine their incomes and deductions, and they must file as married individuals.
Filing Status
If a couple is married on the last day of the year, they can either file a joint return, combining their incomes, deductions, and credits, or file as married separately. Generally, filing jointly will provide the best overall tax outcome. But there may be extenuating circumstances requiring them to file as married separately. As mentioned earlier, married filing separate status contains many restrictions. These restrictions keep married couples from taking undue advantage of the tax laws by filing separate returns. Best look before you leap.
Combining Income
The tax laws include numerous provisions to restrict or limit tax benefits to higher-income taxpayers. The couple’s combined incomes may well be enough that they’ll encounter some of the higher income restrictions, with unpleasant tax results.
Affordable Care Act
If one or both spouses acquired their health insurance through a government marketplace and were receiving a premium supplement, their combined incomes may exceed the eligibility level to qualify for the accessory, which may have to be repaid.
Tax Filing Status Change #4: Widowed
When one spouse of a married couple passes away, the widow/-er may still file a joint return for the year of the spouse’s death. Furthermore, the widow or widower continues to use the combined tax rates for up to two additional years, provided the surviving spouse hasn’t remarried and has a dependent child living at home. This provides some relief for the survivor. Otherwise, they could struggle with an unexpected tax increase while also facing the potential loss of some income, such as the deceased spouse’s pension and Social Security benefits.
Are any of these situations relevant to you or a family member? Looking for additional details that may also apply to your specific set of circumstances? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
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