One of the most common questions this time of year is how a client should file their tax returns–should they file married filing jointly, head of household, individual, or married filing separately. The correct choice for your situation can save you money and potential liability for improperly filed taxes.
A person who is divorced or legally separated before December 31 of the tax year, cannot file a joint return. They must file either an individual return or as head of household. If your marriage has not yet been dissolved or you are not legally separated, you may file as married filing jointly or married filing separately.
Married Filing Jointly
Married filing jointly status will produce the lowest tax rates and the highest standard deduction. The spouse paying support will benefit from this status because their overall tax liability will be lower. That will allow for more available net income for the paying spouse and more support for the supported spouse. As a result, until your divorce is final, it may benefit the spouses to file married filing jointly.
On the other hand, a joint return will usually expose both spouses to joint and several liability for any tax due on the return. The lower earning spouse may ask for an indemnification from their spouse. While such an indemnification may be binding between the husband and wife, it is not binding on the IRS.
Married Filing Separately
Married filing separately has many downsides including the loss or limitation of many credits and deductions such as the Child and Dependent Care Credit. And the higher paying spouse will be required to pay tax at a higher rate which results in lower available net income to pay support.
The main advantage of filing a separate return is to avoid joint and several liability for an improper return filed by your soon to be ex-spouse and to enable a deduction for spousal support (alimony) while you are still married.
Head of Household
To file as a head of household, you must be unmarried on December 31 of the tax year, maintain a home where a child lives for more than half of the year, and pay over half of the expenses of maintaining the home. If you are eligible, persons filing head of household will get a lower tax rate than that of single taxpayers, but higher than that for married persons filing jointly.
Abandoned Spouse Rule
Even if you are still married, you can nevertheless file as a single person if you meet the following requirements:
1. You file a separate return;
2. You maintain a home where a child for whom you may claim a dependency deduction lives for more than half the year;
3. You must provide more than half of the cost of maintaining the home during the year; and
4. During the last 6 months of the year, your spouse must not live in the same house as you.
For maximum tax savings, the abandoned spouse status will often be most favorable.