Three Top Issues with Divorce and Taxes
Episode 47: In this episode, Timalyn discusses three top issues arise involving your taxes after a divorce. Divorce happens and Timalyn has worked with many clients who are caught in this situation. While she’ll focus on 3 important issues, that doesn’t mean those are the only issues related to divorce and taxes. Today, she’ll address filing status, claiming dependents moving forward, and dealing with a joint tax liability after the divorce. With that being said, let’s listen to Timalyn.
Note to Tax Professionals: Timalyn is going to be teaching a class on Divorce and Taxes via the myCPE platform. She’s previously provided a class to subscribers of Think Outside the Tax Box. Those classes take a deeper dive into topics such as property settlements and transfers, Qualified Domestic Relation Orders (QUADROs), etc.
Determining Your Optimal Filing Status
Timalyn begins by discussing whether the divorce was amicable or not. If the divorce was not finalized by the end of the tax year, then technically and legally, the couple can still file as married filing jointly. If there’s a tax liability, you want to consider not filing jointly because that will be just one more thing tying you together.
Another option is to use the status, married filing separately. This could make sense if you and your soon to be ex-spouse aren’t getting along, but a refund is expected. You wouldn’t have to worry about splitting the refund. If there’s a liability, because you filed separately, you wouldn’t have to worry about the other person’s tax liability.
If you were to choose married filing separately, you’ll be in the same tax brackets as if you were filing as a single. Therefore, more of your income is going to be taxed at a higher rate.
Here are some quick examples:
● Married Filing Jointly – the standard deduction is ~ $27,000 for 2023 returns.
● Married Filing Separately (e.g. Single) – the standard deduction is ~ $13,000.
Therefore, the person filing separately or as a single, will remain in the 10% and 12% tax brackets for a shorter period of time compared to someone who is filing using the status married filing jointly. This couple wouldn’t jump to the 22% tax bracket until the reach almost $110,000 in gross income.
However, a person using married filing separately, or as a single, they’ll jump to the 22% tax bracket when they get to ~ $55,000 in gross income.
The thing to remember is that if you had your W-4 withholdings set as married filing jointly, assuming you made $50k and your spouse made $60k, your withholdings are only going to cover 12%. So, the spouse making $60k will still have withholdings closer to 12%. But, after separating if that spouse files using married filing separately, they will now be getting taxed at the 22% bracket.
By working together as the divorce proceeds, you may be able to agree to file using married filing jointly to receive the best tax benefit for both parties.
The IRS 1040 provides a spot so you can file an additional form enabling a couple to split the tax refund so that it goes into 2 separate accounts. The court may need to decide how the allocation will be made.
How to Handle Dependents for Tax Purposes After a Divorce
If dependents are involved, an important consideration is the determination of whether the couple was separated at all, during the tax year. If they were separated (not cohabitating), did that occur in the last 6 months of the year?
Assuming the couple wasn’t living together during the last 6 months, but one parent took care of more than 50% of the dependent’s expenses:
● The parent who did not have the child could file married filing jointly (if the other spouse agreed) or married filing separately.
● The parent who did have the child could file married filing jointly (if the other spouse agreed), married filing separately or file as head of household (because for the last 6 months they were legally separated and they did maintain the household, incurring more that 50% of the dependent’s expenses).
Filing using the head of household status gives you a tax bracket that is lower than married filing separately, but not as low as married filing jointly. The jump to the 22% bracket won’t happen as quickly and the standard deduction will be ~$19,000 (for the 2023 tax year).
Timalyn strongly advises that your either have a tax professional prepare your taxes during this period, or that you at least consult with one. You have some options and you want to make sure you select the best one for your particular situation.
NOTE: If you were divorced as of December 31st of the tax year, then married filing jointly and married filing separately are not available to you. You have the options of filing as a single or as head of household (if you qualify).
Which Parent Gets to Claim the Child?
If the divorce is amicable, you could have the custodial parent complete IRS Form 8332. This is an important form. It’s a Release or Revocation of Release of Claim to Exemption to Child by Custodial Parent. Because there are no longer exemptions for a child or children, it’s an all or nothing situation.
The custodial parent gets to claim the child tax credit. However, the custodial parent can use Form 8332 to release the child tax credit to the other parent.
Depending upon the divorce decree’s designation of the custodial parent, it’s that person who needs to sign the release, designating which year(s) it will apply. It’s during that year or years the non-custodial parent can claim the child.
Understand, there is nothing to block a child from being claimed when you e-file. It can be a race to see who claims the child first. If a return is submitted including the child’s social security number as a dependent, it blocks the other parent’s return from being accepted – if that child was already claimed.
This is why the IRS Form 8332 is so important. If you did have the right to claim the child, you have the 8332 to support your position when you take it to the IRS.
Many people don’t realize the IRS trumps your divorce decree. Even though the family court designated the custodial parent, the IRS is going to look at specific rules. This includes the number of overnight stays during a particular tax year. It also considers which parent maintained the household where the child lived, as well as who paid more than 50% of the expenses.
If the parents were even on the overnights and expenses, there are tie-breaker rules. Again, these are just a few reasons why the tax law is different than your state’s family law. Form 8332 can eliminate the frustration and games. It can protect both of the parents, down the road.
For more information on which parent should claim the child, listen to Episode 19. There’s also a related article on Tax Tips with Timalyn.
Dealing with Joint Tax Liability after a Divorce
If you had a tax liability while you were still married, it is a joint tax debt, regardless of what the divorce decree states. The IRS considers both individuals responsible. There may be a way for you to claim injured spouse relief or possibly innocent spouse relief. Timalyn has published episodes on both topics. Remember, there are specific timeframes for making these claims and your specific state jurisdiction may have guidelines.
If you think you are eligible for innocent spouse relief, book a consultation with Timalyn at Bowens Tax Solutions.
Please consider sharing this episode with your friends and family. There are many people dealing with tax issues, and you may not know about it. This information might be helpful to someone who really needs it. After all, back taxes shouldn’t ruin their life either.
As we conclude Episode 47, we encourage you to connect with Timalyn on social media. You’ll be able to subscribe to this podcast on Spotify, Apple Podcasts, Google Podcasts, and many other podcast platforms.
Remember, Timalyn Bowens is America’s Favorite EA and she’s here to fill the tax literacy gap, one taxpayer at a time. Thanks for listening to today’s episode.
For more information about tax relief options, visit https://www.Bowenstaxsolutions.com/ .
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Disclaimer: This podcast is for informational and educational purposes only. It provides a framework and possible solutions for solving your tax problems, but it is not legally binding. Please consult your tax professional regarding your specific tax situation.