Taxpayers are frequently blindsided when their filing status changes because of a life event such as marriage, divorce, separation or the death of a spouse. These occasions can be stressful or ecstatic times, and the last thing most people will be thinking about are the tax ramifications. But the ramifications are real, and the following are some of the major tax complications for each situation.
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Separated
Separating from a spouse is probably the most complicated life event and is 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 to 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 separate. However, when married taxpayers file joint returns, both spouses are responsible for the tax on that return (referred to 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 true even if the couple later divorces, so when deciding whether to file a joint return or separate returns, taxpayers who are separated and possibly on the path to a divorce should consider the risk of potential future tax liability on any joint returns they file.
See this related post from Dennis Harabin: Consequences of Married Filing Separately
Couples who are married on the last day of the tax year basically have two filing status options when filing their tax returns: either Married Filing Jointly (MFJ) or Married Filing Separately (MFS) returns. Generally, filing MFJ will produce a better tax result. However, other factors – usually personal or financial rather than tax-related – can come into play that causes taxpayers to choose to file MFS returns.
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 is entitled to claim 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 prior to 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, post-2018 agreement alimony cannot be treated by the recipient as earned income for purposes of an IRA contribution and can’t be deducted by the payer.
A 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.
See this related post from Dennis Harabin: Filing as Married Separate? Better Read This.
Married taxpayers have two options when filing their 1040 or 1040-SR tax returns. The first and most frequently used filing status is married filing joint (MFJ), where the incomes and allowable expenses of both spouses are combined and reported on one tax return. The joint status almost always results in the lowest overall tax. Spouses who file together are jointly liable for the tax, meaning either or both can be held responsible for paying the tax from the joint return.
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 upon just their own income.
Divorced
Once a couple is legally divorced, tax issues become clearer because each former spouse will file based upon their own 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 is used to determine the filing status for that year. So, if a couple is divorced 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 is the one entitled to claim the child’s dependency and associated tax benefits unless the custodial parent releases the dependency to the other parent in writing. The IRS provides Form 8332 for this purpose. The release can be made for one year or multiple years and can be revoked, with the revocation becoming effective in the tax year after the year the revocation is made.
Most recently, family courts have been awarding joint custody. If the parents cannot agree on who can claim a child as a tax dependent, then the IRS’s tie-breaker rule will apply. This rule specifies that the one with custody the greater part of the year, measured by the number of nights spent in each parent’s home, is entitled to claim the child as a dependent. The parent claiming the dependency is also eligible to take advantage of other tax benefits, such as childcare credits and higher education tuition credits.
Alimony –See alimony under “separated”.
See this related post from Monica Connell, Pastor Dan Fenco, and Dennis Harabin: 3 Things To Know Before Getting Married
A relationship with someone who is unhealthy or if the relationship itself is identified as unhealthy, there is poor communication instead of harmful communication or threats. It means not addressing problems, not listening to each other, and other behavior that is inconsiderate. There is a lack of trust whereas an abusive relationship would have accusations and blame. An unhealthy relationship would just have a lack of trust or being in between.
Recently Married
When a couple marries, their incomes and deductions are combined, 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 separate. Generally, filing jointly will provide the best overall tax outcome. But there may be extenuating circumstances requiring them to file as married separate. As mentioned earlier, married filing separate status is riddled with restrictions to 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 insurance through a government marketplace and were receiving a premium supplement, their combined incomes may exceed the eligibility level to qualify for the supplement, which may have to be repaid.
See this related post from Daniel Fenco: Does Marriage Counseling Work Towards a Happy Married Life?
There’s a never-ending stream of self-help books and magazines that offer advice when it comes to this topic: What's the secret for a happy marriage? Others would say love, communication, trust, and personal time with each other. Some advice today may be viewed as unworkable tomorrow. For Pastor Dan, you can add one thing to the recipe so that couples can have a happy union despite shortcomings and imperfections.
Widowed
When one spouse of a married couple passes away, a joint return is still allowed for the year of the spouse’s death. Furthermore, the widow or widower continues to use the joint 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, who would otherwise be straddled 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.
If any of these situations are relevant to you or a family member, please call our office at 551-249-1040 for additional details that may also apply with respect to your specific set of circumstances.
Do you need more information? You can reach out to Dennis Harabin at Relax Tax today!
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