As the tax filing date for each year steadily approaches and you begin organizing and/or gathering documents to assist in your upcoming tax preparation for the prior fiscal year, you may want to consider whether you and your spouse are going to file married jointly or married filing separately.
Disadvantages of Separate Returns: Married couples who file jointly are taxed as if each spouse had exactly the same taxable income. Accordingly, substantial tax savings are realized by filing jointly.
Different tax rates on separate returns; earnings taxed separately: If you are separated from your spouse but still legally married by the end of 2006, you must file separately unless you and your spouse agree to file a joint return or a court has entered a judgment of legal separation. A later obtained judgment or marital dissolution does not relate back to an earlier year in which you and your spouse were married.
You and your spouse will each be taxed on your respective earnings separately. But you will each have to allocate income, treating income earned before the date of separation as community property (taxable half to each) and income earned after the separation date as the earning spouse’s separate property. If all income is community income so that the income and deductions are divided equally among you and your spouse, the total tax on separate and joint returns will be the same.
Restrictions on itemized deductions and child care credit: If you and your spouse file separate returns, you both must agree to itemize deductions. If not, then neither can. IRC Section 63(e)(1). No child credit may be claimed on a spouse’s separate return unless the other spouse was absent from the household during the last six months of the year. IRC Section 21(e)(4)
Allocation of tax liability: Separated spouses who are willing to file jointly should reach a clear agreement as to how the tax liability will be apportioned between them. A logical approach is to prorate the tax liability by using a ratio based on the parties’ separate incomes. In the alternative, spouses may chose to allocate liability based on what each would have paid if separate returns were filed.
Relief from tax liability: Generally, spouses who sign a joint return are each jointly and severally liable for the tax shown on that return, including any tax deficiencies, interest and penalties attributable to the other spouse. The liability exposure should be kept in mind when deciding whether to file jointly or separately.
Potential joint liability relief: A spouse wrongfully exposed to joint liability for deficiencies, interest and penalties may have recourse under an indemnification agreement or under various code provisions. For example: (1) ‘Innocent Spouse’ relief from liability for tax deficiencies attributable to erroneous items of the other spouse (IRC Section 6015(b)); (2) ‘Separate liability’ relief from liability for tax deficiencies (IRC Section 6015(c)); and Equitable relief from liability for tax deficiencies and underpayments (IRC Section 6015(f)).
Helpful assistance can also be found at the IRS Web site http:/www.irs.gov.
SOURCE: Adapted from a post by California Family Law Practice Blog
Have more questions about divorce and taxes? Please call our experienced Atlanta GA divorce attorneys for an in-depth strategy and planning session at 770-425-6060 or fill out an online contact form.
The innocent spouse rules have been liberalized in new tax legislation, making it easier for spouses to qualify for tax relief. In addition, the legislation allows a spouse to limit her liability on a joint return to her separate liability. This is a boon to separated spouses who continue to file joint returns with their spouses, and it offers greater protection to divorced spouses who face liability for taxes on returns they jointly filed during marriage.
The innocent spouse provisions provide tax relief to a spouse who jointly files with her husband (or vice versa) if there was a tax understatement attributable to her spouse and she did not know about the understatement when she signed the return, nor did she have reason to know of the tax understatement. If she knew there was an understatement but didn’t realize the extent of the understatement, she may be granted partial relief.
Under new Internal Revenue Code Sec. 6015, a spouse can now elect to limit her liability for unpaid taxes on a joint return to her separate liability amount. That amount is the tax on items that would have been allocated to her had she filed a separate return. There’s one catch though – any item of which the spouse had actual knowledge is allocable to both spouses. The good news is that the IRS must prove that she had knowledge of the misstatement or omission that caused the deficiency.
To qualify for the separate liability election, the taxpayer must be divorced, legally separated or living apart from her spouse for at least a year at the time she files the election. The election must be made within two years after the IRS begins collection efforts against the innocent spouse. But even if the spouse fails these tests, the IRS can grant relief from tax liability if, based on all the facts and circumstances, it is inequitable to hold her liable.
The new rules take effect immediately, as long as the taxes remain unpaid. A spouse who has already paid more than her share of the liability can’t receive a refund under the new law, although there is a special exception for taxes paid between July 22, 998 and April 15, 1999. For that reason, anyone with unpaid taxes who might qualify for the separate liability election should consider her options carefully before she pays any portion of the tax due. Since tGinita Wall, CPA, CFP, CDS here is no downside for the spouse filing the separate liability election, she should make the election in all situations in which she qualifies and is faced with a tax deficiency.
Relief from tax deficiencies will not be granted if the item giving rise to the tax deficiency is attributable to the spouse requesting relief, if she had reason to know of the unpaid tax liability, if she significantly benefited from the unpaid tax liability, or if a divorce decree or separation agreement legally requires her to pay the tax liability.
SOURCE: DivorceMagazine.com in an article by Genita Wall, CPA, CFP, CDS
The first thing certified divorce practitioner Clay Caldwell tells his clients is to “reach agreements with each other.” It’s very important, he said, to talk with your spouse and straighten out money issues. It’s very easy to lose money if the separating couple isn’t communicating.
Decide the best way to file your taxes
There are three options when filing for taxes. Filing as "Head of Household" saves you the most money and varies with income. In order to qualify under this label, you must pay more than half the cost of keeping up the home and a qualified person, such as a child, must be living with you.
The second option is to file jointly. If you have not filed for divorce before Dec. 31, filing jointly is more beneficial to you and your spouse, according to experts. Joint filing means you are both responsible for all taxes and are each entitled to a prorated share of any refunds. It also puts you in a better tax bracket. If there are additional taxes or penalties because of fraud or negligence on past returns, you could qualify as an "innocent spouse," according to Caldwell.
Filing separately is the last way to file. This option usually means paying the most taxes. The good news, however, is that you are only responsible for your own taxes.
Choose who will claim the children
Deciding who will claim the children depends on many things. Couples should figure out who has the higher income and who sits in the better tax bracket. The parent who establishes custody gets a dependency exemption, which could come to about $3,000 per child.
Child support is not tax deductible because it’s considered something you’d pay whether or not you are divorced. However, alimony or “maintenance” is tax deductible.
State tax laws differ on divorce. Some states, such as Texas and California, are known as common law or community property states. These states treat all property owned by a married couple as a shared asset. “When you file for divorce everything is subject to division,” said Ken Raggio, a Dallas-based divorce lawyer. California, for instance, splits community property 50/50.
Property transferred between spouses isn’t subject to taxes. But selling stocks, homes and vacation homes as part of a divorce are taxed. A jointly-owned residence that one spouse has been granted the use of is tax deductible contingent upon agreements between the couple and IRS regulations. "If the non-residential spouse has agreed to pay the expenses, half the mortgage payment may be deducted as alimony, and the other half deductible as interest expenses,” said Caldwell.
Follow up on beneficiary forms after the divorce
The last tip, and perhaps the most complex divorce tax issue is retirement. “Retirement rules are so complicated, without a lawyer people can lose a lot of money,” said Lee Rosen, a North Carolina tax divorce lawyer.
All retirement benefits including qualified and unqualified plans, vested or unvested stock options, restricted stock or any other form of deferred compensation are divisible in a divorce. The transfer of retirement benefits is not taxable. Retirement benefits from an ex-spouse are taxable as ordinary income when withdrawn. You will also be taxed if you use the retirement benefits before age 59½ or don’t roll them over the right way.
When it comes to taxes in divorce, people are getting a lot smarter because they don’t want to lose money, experts said. “Time is money in divorce law,” said Caldwell. It’s very unlikely you will figure out all the tax issues alone with your spouse. Keeping that in mind, any professional tax advice prior to your divorce is tax deductible, so it may be worth it to get some financial guidance.
SOURCE: Fox Business
SOURCE FOR POST: California Divorce and Family Law Blog
Your marital status on the last day of the tax year determines your income tax filing status for that tax year. If you have a final decree of divorce as of December 31, you can file as single, or you may qualify for head of household status. However, if your divorce is not yet final as of December 31, you can file jointly or married filing separately.
Usually filing jointly results in a lower tax. However, filing jointly will make you responsible for your spouse’s tax liability including penalties and interest, since a husband and wife have ‘joint and several liability’ on a joint return.
To qualify as head of household you must meet the following requirements: 1) You paid more than half the cost of keeping up your home during the year; 2) your home was the main residence for you and your children for half of the year; and 3) your spouse hasn’t lived in your home for six months.
Source for Post: Oklahoma Family Law Blog, and South Carolina Family Law Blog and Divorce Help Network, which reposted it.
Federal Income Tax FAQ’s
Divorce Versus Annulment: The Tax Difference
Taxes & Divorce: Qualified Domestic Relations Order
Taxes & Divorce: Requirements for Head of Household Filing Status
Taxes & Divorce: Whether to File a Joint Return, Separate Returns, or No Return
TAX RETURN PLANNING DURING THE SEPARATION PERIOD
Georgia Family Law Blog: Taxes
Janet Langjahr of the Florida Divorce Law Blog posted this article about tax issues in divorce cases:
Divorcing couples always have at least basic questions about the impact of divorce on their taxes and their tax status.
Everything depends on whether your divorce was final on December 31st of the tax year in question. If it was, you can file as single. If it wasn’t, you can file jointly or as married, filing separately.
Although married couples filing joint returns receive more favorable tax treatment, each joint filer will generally be responsible for the couple’s entire tax liability.
Child Dependency Exemption:
This generally goes to the custodial parent, although it can be negotiated away to the non-custodial permanently or in alternating years. A special IRS form must be signed by the custodial parent if the exemption is being bargained away.
Dependent Child Care Tax Credit and Earned Income Credit:
These go to the custodial parent and that is not negotiable.
Education Tax Credits:
These go to the parent who has the dependency tax exemption.
More information is in the LancasterOnline.com article printed below:
In order for the non custodial parent to take the dependency deduction, it is essential to file the Form 8332 with the tax return. The Family Law Taxation blog cites a case in which the tax Court announced that this requirement will be strictly applied.
In Chamberlain v. Commissioner, the U.S. Tax Court ruled that the former husband (taxpayer) was not entitled to the dependent deduction for one of his children because he didn’t attach a valid IRS Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents) to his 2003 Federal tax return (the child credit was also denied because it is premised on being entitled to the dependent deduction for the child).
The taxpayer’s former wife executed a Form 8332 in which she relinquished the dependency deduction for one of their two children beginning in 1995 and for all future years. The taxpayer claimed that he attached the original Form 8332 to his 1995 return, but that a subsequent fire destroyed all of his copies. The IRS was unable to provide a copy because their 1995 tax return information had been destroyed (pursuant to IRS document destruction policies).
This result may seem harsh, but as the Court indicated, "Although we are sympathetic with [taxpayer’s] plight, we are bound by the wording of the statute as enacted and accompanying regulations when consistent therewith.
It is clear, if you are seeking to claim the dependency deduction, make sure the proper forms are filed with the tax return.
SOURCE: New York Divorce Report