This time of year, I am often asked the question by my divorce clients: How should we file taxes?
While the question may seem grossly simple, there is no simple answer. A number of factors must be taken into account, including:
- How far into divorce proceedings are the parties?
- How close is a final judgment of divorce to being granted?
- What was the income of each party for the given tax year?
- Is there an agreement as to how any exemptions for children will be handled?
- Is there an agreement as to how the parties will split any refund?
- Is there an agreement as to how the parties will contribute to any tax liability?
- Are both parties W-2 wage earners, or will a Schedule C be completed?
Generally speaking, married filing jointly is often the most advantageous way to file while going through a divorce. The parties can either agree ahead of time how to split up any refund or tax liability, or, if they cannot agree, often the refund (if there is one) will go to one of the attorneys to hold in escrow until the parties can either decide amongst themselves how to divide it, or the Court makes that decision for them.
Occasionally, there are issues of a family business, that one party is highly involved with and the other party knows next to nothing about. This situation can present serious issues if there is any question of one party “cooking the books” and then requesting that the other party file a joint return. Such a situation can leave the innocent party open to serious liability for signing a fraudulent return.
In the case of the average John and Jane Doe, W-2 wage earners, there can arise an issue where one party has had nothing withheld from his or her pay checks, and the other party has had a large amount withheld from each pay check. In this situation, the party who has had money withheld, will usually want to file married separate, because he or she will get a large refund. On the other hand, the party who had nothing withheld (counting on the withholding of the other spouse to cover the tax liability for the year) will usually owe a large tax liability. When this occurs, filing jointly is usually the way to solve the issue. In the event that one party surreptitiously files married filing separately to grab the big refund, leaving the other party with a huge and unanticipated tax burden, the remedy usually lies with a motion to the divorce court to equalize the refund vs. burden. Courts look dimly upon such behavior, be warned.
Remember that if children are involved, the non-custodial party (the one the kids are not regularly living with) will need to have IRS form 8332 executed by the custodial parent (the one the kids regularly reside with) to submit with the tax return in order to claim a dependency exemption (assuming the parties agreed that the non-custodial parent would take one or more dependency exemptions). IRS form 8332 is available here.
The safest way to decide how to file taxes while a divorce is pending is to discuss the matter with your attorney. While I have addressed a few common issues that arise, every situation is unique and requires careful consideration by someone with the knowledge and experience to guide you through making an appropriate choice.
Going through a divorce, the parties also need to remember that the attorneys are not CPA’s or tax Preparation experts. With that in mind, one usually safe answer to the old question, “How should we file taxes?” is to go to a CPA or Tax Preparation Professional, have him or her run the numbers under the various filing options, and to go with the most advantageous.