April 1, 2015
In late March/early April, many divorcing couples have to make an important decision about filing their income taxes.
- In Pennsylvania, divorcing couples sometimes state their filing status as “single” because their accountant said they can file separately. However, that’s not an option. The parties may either file “jointly” or “married filing separately.” In some states, there is a decree of separation, and the IRS will allow those legally separated to file separately. Pennsylvania law does not provide for legal separation.
- One cannot assume that there will be benefits to filing jointly rather than filing separately. The best way to determine this is to have an accountant familiar with both husband’s and wife’s income to run an analysis as to the tax liability when filing jointly compared to separately.
- Parties who have filed jointly in the past, but want to file separately pending the divorce, will have to allocate or divide shared deductions, joint interest and joint dividends. The biggest deduction is likely the mortgage interest deduction. Was that paid from a joint account? Who signed the checks? Does one spouse assume the right to take the deduction alone, thereby skewing the tax liability of the other? These questions must be addressed with one’s attorney and accountant.
- The custodial parent of minor children may qualify as Head of Household. The key considerations is whether the parties were separated before July 1. In other words, the Head of Household must have been separated and primary custodian of the child for over 6 months of the tax year. The parties must properly take the dependency deduction for minor children. The other parent – the one who cannot claim as Head of Household – will be filing in the highest tax bracket: married filing separately.
- Can the parties file one way and amend to an alternate status at some time in the future? Yes, but that option only goes one way. You can file separately and thereafter amend to file jointly within three years of the original tax filing due date.
- Couples may agree to file jointly to save taxes, but in doing so, they should also consider having an Indemnification Agreement. Such Agreement will be a private contract between Husband and Wife in the event there is a problem with the joint return, (i.e. error with income reported, taxes due, refund due, etc.) That private Indemnification will not preclude the IRS from pursuing both spouses. Even if the IRS finds that more taxes are due and attributed to the declarations or omissions of one party, in the eyes of the IRS, such additional tax liabilities will be deemed a joint obligation, and the. IRS can go after both parties for payment. The non-offending spouse will thereafter seek to enforce the Indemnification Agreement for reimbursement from the offending spouse. Good luck.
The information above is general: we recommend that you consult an attorney regarding your specific circumstances. The content of this information is not meant to be considered as legal advice or a substitute for legal representation.