If you’re married or single, at least one thing at tax time is straightforward. You likely know whether you’re filing jointly or separately fairly early on. But if you’re in-between the stages of married and divorced, things can be a little more confusing. Just as when you were married, though, you’ll have only two choices as a separated couple: married filing jointly or married filing separately.
During marital separation, you’ll need to file a married status tax return unless your divorce was granted before Dec. 31. You’ll file as either married filing jointly or married filing separately.
Filing Taxes When Separated
Filing taxes when a divorce is not final means looking at how the Internal Revenue Service sees your marital status. For IRS purposes, you’re married if you still do not have a final divorce decree on the last day of the tax year. So, if your court date is Jan. 2, you’ll still have to file as either married filing jointly or married filing separately.
Your filing status plays an important role in the taxes you get back. In the vast majority of cases, filing jointly as a married couple is better than filing separately. However, by filing as a couple, you also increase your own liability if your soon-to-be ex does something shady. You’ll also have to deal with coordinating with your estranged spouse to complete the proper forms and file.
Legally Separated and Taxes
There is one major exception to the restrictions on filing during a separation. If you’re considered legally separated, IRS regulations may allow you to file claiming single status. In order to do this, you’ll need a decree of separate maintenance by the end of the tax year. This will come from the court and may issue separate maintenance, which is a form of alimony that applies pre-divorce.
However, there is one thing complicating whether or not you can file as single if you’re legally separated as of Dec. 31. The IRS directs you to follow state law to determine whether you are considered still married or legally separated once a decree of separate maintenance has been issued. In New York, for instance, you’ll file a legal separation agreement with the courts. There’s a fee for this, but it establishes clear boundaries regarding child custody and other financial matters.
How to File Taxes Together
In addition to the legal restrictions imposed on filing as a separated couple, there are logistical considerations. Even if it’s far better financially for you to file jointly, you may find that working with your spouse to do everything isn’t worth that savings. If you file separately, you can handle everything on your own, using the tax preparer or tax preparation software you choose, without having to coordinate with someone else.
If you do choose to file jointly, though, you don’t have to sit side by side while you’re doing so. Many tax preparers will let you drop off your paperwork and then come back to sign when your return is ready. You may also find that you can both mail your paperwork to your tax preparer and sign electronically. Look into alternatives to showing up at the same appointment or sitting at a table to fill out the forms together.
Deductions and Filing Status
Filing taxes when separated does require you to collaborate on your deductions. If you’re married filing separately, you’ll need to choose together whether you itemize your deductions or take the standard deduction. Whichever choice you make, you’ll both have to file your tax return that way. If you’re filing together, this won’t be an issue since the choice you make will automatically be binding for both of you.
If you choose to itemize, how you divide your deductions depends on how those expenses were paid. For money that originated from your joint checking account, whether before or after your split, you’ll divide that expense in half and each claim your portion. When paid separately, though, the expenses go on the tax return of the spouse who paid them.
Joint Property and Taxes
Many married couples own property together, which is then either divided or sold during the divorce process. Normally as a married couple, you’d claim the mortgage interest and property tax on your return. This is where filing jointly can benefit you as a separated couple since you’ll be able to claim those expenses.
If you’re married filing separately, you’ll only be able to claim the property tax and mortgage interest you paid individually on your taxes. If you had a casualty loss on a home during the tax year, though, you can halve the amount and claim it, subject to limits on deductions for the tax year.
File Taxes When Divorced
Chances are, your divorce wasn’t final Dec. 31. That means you were probably married for part of the tax year and divorced the rest. The IRS goes by your marital status as of Dec. 31, expecting you to file based on that. If your decree is dated May 15, you’ll file as a single taxpayer when you do that year’s taxes.
One problem many newly-divorced taxpayers encounter, though, is that they didn’t adjust their withholdings. That means they may not have had enough taxes withheld from each paycheck, resulting in taxes due in April. As a single person, you’ll likely find you fall into a different tax bracket than if you were married filing jointly.
Head of Household Status
Another wrinkle in your tax filing comes if you have children and are accustomed to claiming Head of Household status. As Head of Household, you get a lower tax rate, as well as a higher earnings threshold in some cases. Filing taxes when separated lets you still claim that status.
In certain circumstances, you may still be able to claim Head of Household status once you’re divorced. The requirement is that you must have a qualifying child living with you for more than 50 percent of the year. If you share custody with your spouse, that means the parent who has the child the majority of the year claims Head of Household status.
Children of Separated Parents
If you file separately or you’re already divorced, how you claim your children will change. A quick review of the IRS’s Tests to Be a Qualifying Child reveals that the child must have lived with you for more than half the year. That means only one parent will be able to claim the child: that will be the parent who had custody the most.
There is one exception to the qualifying child rules. If the child meets all the other rules and the custodial parent signs a written declaration, the noncustodial parent can claim that child as a dependent. The declaration should be attached to the noncustodial parent’s tax return to avoid processing delays.
Alimony Payments and Taxes
In most cases, if you’re filing taxes and your divorce is not final, you won’t be worrying about alimony yet. But you can be granted separate maintenance as part of a separation agreement. Separate maintenance works like alimony in that the receiving spouse gets regular payments. Whether it’s separate maintenance or post-divorce alimony, though, you’ll need to report it to the IRS.
Before the recent tax changes, paying spouses could claim their alimony payments as a deduction and receiving spouses were required to report it as income. The Tax Cuts and Jobs Act eliminated that requirement. However, it’s important to note that this change only applies to divorces finalized after Dec. 31, 2018. If your decree is dated before that, paying spouses will need to meet the IRS’s requirements regarding alimony in order to continue to claim the deduction.
Divorce Fees and Taxes
During divorce, legal fees can quickly add up. Until recently, you could claim some of those fees on your taxes – specifically, those fees that were connected to settling alimony and post-divorce tax advice. Unfortunately, the tax laws have altered those deductions.
Under the TCJA, for those who are divorced or legally separated, IRS officials will no longer allow a tax deduction for those fees. It’s not specific to divorce. In fact, the IRS has done away with quite a few itemized deductions, and that includes claiming those legal fees. The good news is that the IRS increased the standard deduction to $12,000 per person for the 2018 tax year ($12,200 for tax year 2019) to make up for it.
Home Transfers and Taxes
In the midst of divorce drama, many couples also must deal with what to do with a shared home. If you transfer your home to one spouse, that transfer is generally nontaxable. However, if one spouse makes a huge profit on the transfer, that money may be subject to capital gains tax. The IRS allows taxpayers to exclude up to $250,000 in capital gains tax as long as the home was your primary residence.
To calculate the gain on the home, you’ll look at the selling price of your house, deducting something called the adjusted basis. The basis is the amount you paid at the point of purchase on the home. You’ll also subtract the amount you spent on improvements to the home during your time there.
Home Sale and Taxes
For couples that sell their home as part of getting divorced or legally separated, IRS laws may apply to any gains you make. If you live in the home for two of the five years before the sale of the home, though, you’ll be able to exclude a combined $500,000 in gains before paying taxes on what you earned.
Spouses who buy out the other person’s interest in the home and live there won’t be free of capital gains tax when they later sell the house. You’ll be subject to capital gains tax on the money you make from the sale of the home based on the laws at the time you sell. If those laws remain the same, you’ll be able to exclude up to $250,000 in gains just as you would have if you’d sold it during the divorce.
Taxes Due and Separation
When you’re still married, you’re responsible for paying any taxes due as a couple. Once you’re separated, though, it gets a little more complicated. You’re both responsible for paying any tax, interest and penalties due on a joint return for any tax year ending before your divorce is final. So, if you’re filing last year’s taxes and your divorce isn’t yet final, you’ll be both jointly and individually responsible for settling that debt.
The good news is there are some cases where you can request to be absolved from your spouse’s tax debt. You’ll file Form 8857 to request this relief. You’ll need to file the form within two years of the IRS trying to collect the tax from you, and the IRS will contact your former spouse to discuss the situation.
- IRS: Publication 504 (2017), Divorced or Separated Individuals
- The Motley Fool: Should Any Married Couples File Separate Tax Returns?
- Jeffrey B. Peltz, PC: Legal Separation in New York
- IRS.gov: Other Deduction Questions
- Meriwether & Tharp Law Office: Don’t Forget to Adjust Your Tax Withholding Post-Divorce
- eFile.com: IRS Head of Household Filing Status
- AccountingWeb: Can Divorced Parents Each Claim Head of Household?
- IRS.gov: Table 3. Overview of the Rules for Claiming an Exemption for a Dependent
- DivorceNet: Separate Maintenance and Legal Separation
- MarketWatch: New Tax Law Eliminates Alimony Deductions — but Not for Everybody
- Orr & Reno: Are Divorce Legal Fees Still Tax Deductible?
- DivorceNet: Capital Gains Tax When You Sell Your House at Divorce
- IRS.gov: Publication 971: Innocent Spouse Relief
- Forbes: IRS Announces 2019 Tax Rates, Standard Deduction Amounts and More