Divorce, Separation, Marriage, or Death: How Will It Affect Your Taxes?

Taxpayers are often blindsided when their filing status changes due to a life event such as marriage, divorce, separation or the death of a spouse. These can be stressful or ecstatic times, and the last thing on most people’s minds are the tax implications. But the implications are real and need to be considered to avoid unpleasant surprises.  Here are some of the most important tax complications for each situation.

Separated

Separating from a spouse is probably the most complicated life event. It is certainly stressful for the family involved. For tax purposes, a separated couple can file jointly because they are still married, or they can file separately.

• Filing Status – If the couple has lived apart for the last 6 months of the year, one or both of them can file as head of household (HH). The spouse(s) claiming HH status must have paid more than half the cost of maintaining a household for a dependent child, stepchild, or foster child. A spouse who does not qualify for HH status must file as married filing separately if the couple chooses not to file a joint return. Married filing separately status is subject to a number of restrictions to prevent married couples from filing separately to take unintended advantage of the tax laws.
  • In most cases, a joint return will result in less tax than two returns filed as married filing separately. However, when married taxpayers file a joint return, both spouses are responsible for the tax on that return (referred to as joint and several liability). This means that one spouse can 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 is true even if the couple later divorces, so when deciding whether to file a joint return or separate returns, taxpayers who are separated and may be headed for divorce should consider the risk of potential future tax liability on any joint returns they file.
• Children
  • Who gets to claim the children can be a contentious issue between spouses who are separated. If they cannot come to an agreement, the one who had custody for the majority of the year is entitled to claim the child as a dependent, along with all of the tax benefits that go with it. In determining who had custody of the child for the greater part of the year, the IRS looks at the number of nights the child spent in each parent’s home and ignores the actual number of hours the child 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 other spouse. Prior to the Tax Reform Act, the person receiving alimony included it as income and the person paying it deducted it as an above-the-line expense on their respective separate returns. Under tax reform, alimony is not taxable to the recipient if it is received under divorce agreements entered into after December 31, 2018, or under pre-existing agreements that are modified after that date to treat alimony as nontaxable. Therefore, post-2018 alimony cannot be treated as earned income by the recipient for purposes of an IRA contribution and cannot be deducted by the payer.

A child support payment is not alimony. To be treated as alimony by separated spouses, payments must be designated and required in a written separation agreement. Voluntary payments are not considered alimony.

• Community Property
  • Nine 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 the spouses according to the community property laws of the state in which they reside. This often complicates the division of income between spouses, and they generally cannot file based on their own income alone.

Divorced

Once a couple is legally divorced, tax issues become clearer because each former spouse files based on his or her own income and the terms of the divorce decree regarding spousal support, child custody, and property division.

• Filing Status

  • An individual’s marital status as of the last day of the year is used to determine filing status for that year. For example, if a married couple gets divorced during the year, they will no longer be able to file a joint return for that year or any future years. Unless they remarry, they must file as either single or head of household (HH). To file as HH, an unmarried individual must have paid more than half of the household expenses for a dependent child or dependent relative who also lived in the home for more than half of the year (exception: a dependent parent does not have to live in their child’s home for the child to qualify as HH). If both ex-spouses meet the requirements, then both can file as head of household.

• Children

  • Usually the divorce agreement will specify which parent is the custodial parent. Under tax law, the custodial parent is the one entitled to claim the child’s dependency and related tax benefits, unless the custodial parent releases the dependency to the other parent in writing. For this purpose, the IRS provides Form 8332. The release can be for one or more years and can be revoked, with the revocation taking effect in the tax year following the year of the revocation.

Family courts often award joint custody to parents.  In this case, the IRS tie-breaker rule applies if the parents cannot agree on which of them will claim a child as a dependent for tax purposes. This rule states that the parent who has custody for the majority of the year, as 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 child as a dependent is also eligible for other tax benefits, such as child care and college tuition credits. Alimony –See alimony under “separated”.

Recently Married

– When a couple marries, their income and deductions are combined and must file married.

•  Filing Status

  • If a couple is married on the last day of the year, they can either file a joint return, which combines their income, deductions, and credits, or file as married filing separately. Generally, filing jointly provides the best overall tax result. However, there may be extenuating circumstances that require you to file as married filing separately. As mentioned earlier, the married filing separately status is riddled with restrictions designed to prevent married couples from taking undue advantage of the tax laws by filing separate returns. Best to look before you leap.
  • Combined Income
    • The tax laws contain numerous provisions designed to limit or restrict tax benefits for higher-income taxpayers. The couple’s combined income may well be high enough that they’ll encounter some of the higher income limitations, with unpleasant tax results.
  • Affordable Care Act –
    • If one or both spouses purchased their health insurance through a government marketplace and received a premium subsidy, their combined incomes may exceed the eligibility level for the subsidy, which may have to be repaid.

Widow(er)

– If one spouse of a married couple dies, a joint return is still allowed for the year of the spouse’s death. In addition, the widow or widower can continue 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 to the survivor who would otherwise be faced 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 for additional details that may apply to your specific circumstances.