If you are currently contemplating a divorce or going through the process of a divorce, you are likely learning more than you ever expected. From understanding how to complete household tasks that your partner once did to sorting through your finances in detail, taxes might also have you asking more questions than in year’s past.
In this post, we dive into how a pending divorce impacts tax filing status, the benefits of filing jointly even if you plan to divorce, when you might want to consider filing separately, and what to expect in your post-divorce taxes.
How does my marital status impact my filing status?
Your marital status on the last day of the year dictates your filing status or options for filing. When you have no separation decree or other written document (such as a memorandum of understanding or MOU) by the final day of the year, the IRS considers you married for the entire tax year. Therefore, as long as you are still married on December 31st, you can choose one of the following filing statuses with the respective standard deduction:
- Married filing jointly (standard deduction $25,100)
- Married filing separately (standard deduction $12,550)
- Head of Household (standard deduction $18,800), see filing requirements below
Therefore, you cannot file as “single” until you are officially divorced. Likewise, in the year your divorce decree becomes final, you lose the option to file as married.
Should I file jointly while I am going through a divorce?
Typically, an attorney will recommend that you file jointly to save the most money if you are going through a divorce. Filing jointly offers the marital estate the lowest total tax liability, has the most benefits, and generates the lowest total tax bill. All refunds and taxes due are typically split 50/50 in this scenario.
Is there any reason to file “married filing separately” if you are getting divorced?
Typically, filing jointly will save you the most money. Filing “married filing separately” results in the following:
- Your standard deduction drops significantly (typically in half).
- Filing separately can have negative effects for the AMT tax, if applicable.
- The Tax Cuts and Jobs Act raised the standard deduction amounts for 2021 to $25,100 if married filing jointly and $12,550 if married filing separately. (In preparation for the future, note that single filers have a higher exemption amount of $12,550.)
However, if there is a concern about fraudulent tax returns, or if your spouse is stretching or breaking any tax rules, consider “married filing separately.” If you file together in these adverse situations, you could be liable for paying any taxes, penalties, and/or fines for that filing year, even long after your divorce is finalized.
Lastly, if you have already separated your finances as part of a divorce, you may want to consider “married filing separately”. If you have been managing your finances separately and your spouse has minimally contributed to tax withholdings throughout the year, while you have withheld significantly larger amounts, it may be worth filing separately.
One last detail to note is that if you are filing “married filing separately,” only one party can itemize and the other spouse must take the standard deduction.
How do the requirements for “Head of Household” status work?
Only you or your spouse can file for “Head of Household” status. The requirements for this status include that you:
- Pay for more than half of the household expenses.
- Have at least 183 overnights (more than 50%) with a qualifying dependent.
Even if the dependent exemption/child credit is being shared with the other parent, you do not need the exemption/child credit to qualify for “Head of Household” – you must have the majority of overnights. It’s important to note that the person who files “Head of Household” is the only party that can claim credits such as the dependent care credit and earned income credit, if applicable. If you qualify, Head of Household status can be significantly more beneficial for divorced parents.
What should I expect moving forward, once my divorce is finalized?
While every situation is unique and different, and tax attorneys can provide information most relevant to your specific situation, most final decrees state the following:
- For every year married, both parties are equally responsible for any federal income tax liability.
- For every year married, both parties are entitled to one-half of any federal income tax refund.
As part of your final decree, consider the risk of being audited for a past year and the liability of that audit. This is particularly important if you have a unique situation, such as owning your own business or complex real estate property. Inquire about any protections or stipulations you should put into your decree if these unusual situations are part of your marital estate. As you plan and define your future filing status, make sure your decree addresses who will receive which deductions and child-related credits each year.
At A.M. Financial, we work with individuals in the divorce process to ensure they are set up for financial success. From understanding retirement accounts to tax implications of your divorce, our team can support your needs throughout the process and provide input and direction based on your unique financial goals. We start our partnerships with a free consultation and invite you to schedule yours today.