Should We File Joint or Separate Tax Returns?

Should we file joint or separate returns?

You may only file a joint return if you are married at the end of the tax year (December 31) and both of you agree to file and sign a joint return.¹ The box you check on your return is “Married filing jointly.” Same-sex couples and domestic partners cannot file joint returns. You qualify as married even if you are separated as long as there is no final decree terminating your marital status. A temporary pendente order does not affect your marital status. However, if the divorce is final and your marital status is terminated by the end of the tax year, your filing status is either “Single” or “Head of household.”

There are pros and cons to filing a joint tax return which you should discuss with your tax advisor and your attorney. Generally, your tax burden will be lower, although this will not always be the case depending on your respective incomes, deductions, and credits. The main disadvantage of filing jointly is that both of you are jointly and severally liable for taxes on the return, including any tax deficiencies, interest, and penalties. This exposure can be partially mitigated by executing a Tax Indemnification Agreement discussed below. Also, the IRS may allow relief to a spouse who files jointly. The three types of IRS relief (“innocent spouse,” “separation of liability,” and “equitable relief”) are discussed in IRS Publication 971.

My spouse said he would sign a joint return but is now refusing to do so. May I still file jointly?

Spouses often use tax returns as a bargaining tool. Generally, a joint return can only be filed where both parties agree and both sign the return.² A court will not order unwilling spouses to file a joint return.³ However, in rare circumstances, the IRS will accept a joint return signed by only one spouse where there is evidence of a clear intent to file a joint return and where the non-signing spouse does not file a separate return.⁴ 

What is the effect of filing status upon child and spousal support?

In calculating guideline child and spousal support, the court has to take into account “the annual net disposable income of each parent,” which is computed by deducting state and federal income tax liability from annual gross income, after considering the appropriate filing status and all available exclusions, deductions, and credits.⁵ Therefore, your filing status as “Married filing jointly,” “Separate,” or “Married filing separately” will have an impact on the amount of support you pay or receive. In one case, the California Court of Appeal overturned the trial court’s decision where guideline support had been incorrectly based on the husband’s status as “Married filing jointly” instead of “Married filing separately.”⁶ If the parties calculate guideline child and spousal support using a certified program such as “Dissomaster” and incorrectly input that the parties will be filing jointly when the husband/payor should actually have filed as “Married filing separately” and the wife as “Head of household,” the husband may well end up paying less in child and spousal support because the program makes allowances for tax liability.

If we file a joint return what precautions should we take?

First, make sure that any tax refunds are paid to both of you. If you decide to have any refund sent to you by check, make sure that the check is paid to both of you jointly. If a direct deposit is sought, make sure the refund is routed to a joint account. You should reach a clear agreement as to how tax liability will be apportioned. A common approach is to prorate tax liability using a ratio based on both spouses’ separate incomes. Another approach could be based upon what each spouse would have paid if they had filed separate returns. Then to the extent a spouse’s share exceeds what he or she has already paid by way of salary or withholding or estimated tax, that spouse would pay the difference.

Second, if you are going to file taxes jointly, it’s a good idea to get your spouse to sign a stipulation regarding tax indemnification since both spouses will be jointly and severally liable for taxes on the return, including any tax deficiencies, interest, and penalties. Even if a divorce (dissolution decree) states that one spouse will be liable for any amounts due on previously filed joint returns, the IRS may still hold both spouses jointly and severally liable and go after either spouse.

 
Example of a Tax Indemnification Agreement

 IT IS HEREBY STIPULATED by Wife and Husband as follows:
1. Wife shall immediately provide the Husband with copies of all records and documents necessary for the preparation by Husband and his accountant of Joint Federal and State Tax Returns (“the Tax Returns”) for the year ending _____. Parties acknowledge that the Tax Returns will be prepared solely under Husband’s direction and control.
2. Wife shall immediately respond to any reasonable requests for information from the Husband or his accountant in the preparation of the Tax Returns.    
3. Wife shall sign the Tax Returns immediately upon presentation to her. Such signing does not constitute an admission by Wife as to the accuracy of the Tax Returns.
4. In the event that the parties shall receive a Federal or State tax refund, the _____ shall immediately endorse the full amount of the tax refund check to the ______.
5. The Husband agrees to release, indemnify and hold harmless the Wife from any Federal or State claims, fines, liabilities, penalties and assessments arising out of the filing of the _____ Tax Returns, with the exception of any unreported income to the Wife that she failed to provide to Husband and his accountant in preparing the Tax Returns.
6. The Husband shall pay all costs and fees of any administrative or judicial proceedings in connection with the filing of the Tax Returns.

Be warned. Even if you have a Tax Indemnification Agreement, it may not help you if your spouse files for bankruptcy. If you have doubts about the accuracy of your spouse’s information, file separately.

If I am still married but separated at the end of the tax year (December 31) and my spouse will not file a joint return, how should I file?

You must file either “Married filing separately” or “Head of household” depending on your circumstances. Filing as “Head of household” has the following advantages:

• You can claim the standard deduction even if your spouse files a separate return and itemizes deductions.
• Your standard deduction is higher.
• Your tax rate may be lower.
• You may be able to claim additional credits such as the dependent care credit and earned income credit that you cannot claim if your status is “Married filing separately.”
• There are higher limits for the child care credit, retirement savings contributions credit, and itemized deductions.

If you are still married at the end of the tax year, you can file as “Head of household” if you satisfy the following requirements:

• You paid more than half the cost of maintaining your home for the tax year. Maintaining a home includes rent, mortgage, taxes, insurance on the home, utilities, and food eaten in the home.
• Your spouse did not live with you for the last 6 months of the tax year.
• Your home was the main home of your child, stepchild, or eligible foster child for more than half the year.
• You could claim a dependent exemption for the child.

The other non-custodial spouse must then file as “Married filing separately.” Once you are divorced you may still file as “Head of household” if you pay more than half the cost of maintaining your home for the tax year and your children live with you for more than half the tax year. There are different rules for filing as “Joint Custody Head of Household” and receiving a credit against California state taxes.⁷

If one spouse files “Married filing separately” do we take the standard deduction or can we itemize deductions?

Consider this example. Bob, who separated from Jackie but is still married at the end of 2005, decides to file “Married filing separately” on his 2005 taxes. He decides to itemize deductions which are considerable. Jackie does not have large deductions and wants to take the standard deduction. The rule is that if Jackie qualifies as “Head of household” she can elect to take the standard deduction or itemize.⁸ If she does not qualify as “Head of household” and Bob itemizes, she must also itemize even if she has limited deductions.⁹ This is true even if she files before Bob and claims a standard deduction. She will have to file an amended return when Bob claims itemized deductions.

When the parties file separately, who gets the mortgage interest deduction and property tax deductions?

If the marital home is the separate property of one spouse, he or she can claim the deductions. If the property is jointly owned, the spouse that actually pays the mortgage interest and property taxes is entitled to take the deductions.¹⁰ Other expenses are deductible to a spouse to the extent that they are paid out of separate funds. If they are paid out of community funds, each spouse can deduct one half of the interest and taxes.

Who can claim the dependency exemption and the Child Tax Credit and the Child Care Credit?

Generally, where the parties file separately, the parent with whom the children have resided for the longest period of time during the tax year can claim the dependency exemption and the Child Tax Credit ($1,000 for each child under 17).¹¹ If the child lived with both parents for the same amount of time, the parent with the highest annual adjusted gross income gets to claim the child. It can therefore be important to keep a log of the actual amount of time the children spent with you. However, the non-custodial parent may take the exemption and the credit if the custodial parent signs IRS Form 8332 “Release of Claim to Exemption of Divorced or Separated Parents” or if a divorce decree or separation agreement releases the exemption and satisfies the wording of Form 8332. In California, the court has the power to allocate the dependency exemption to the non-custodial parent.¹² It may do this to maximize support. The Child Tax Credit can only be claimed by the parent who claims the dependency exemption.¹³ Generally, the spouse in the higher bracket should claim the exemption and compensate the other spouse for the shortfall.

The Child Care Credit can only be claimed by the custodial parent if the other parent is not a member of the household for the last six months of the tax year.¹⁴ Unlike the dependency exemption, it cannot be traded; however, the credit may be claimed even if the dependency exemption has been allocated to the other parent.
 

Footnotes                                                                                                                     

1.  Generally see IRS Pub 504 “Divorced or Separated Individuals” at www.irs.gov.
2.  IRS Pub. 17, p.21. Available at www.irs.gov.  26 C.F.R. § 1.6013-1(a)(1).
3.  Marriage of Carlton & D'Allessandro (2001) 91 Cal. App. 4th 1213.
4.  In Riportella v. Commissioner, TCM 1981-463, the tax court held that wife’s failure to sign a joint return was not fatal because she had signed joint returns for the previous two years, had signed a joint Form 4868 for an automatic extension, and had attempted to “sell” her signature for concessions in the divorce.
5.  Fam. Code, § 4059.
6.  Marriage of Carlton & D'Allessandro, supra.
7.  See www.ftb.ca.gov.
8.  I.R.C. § 2(b)(c).
9.  I.R.C. § 63 (c)(6)(a).
10.  Rev. Rul. 71-268.
11.  I.R.C. § 152 (c)(4)(B)(i). IRS Pub. 501, p.12-13.
12.  Monterey County v. Cornejo (1991) 53 Cal. App. 3d 1271.
13.  IRC § 24 (c)(1)(A).
14.  IRC § 21(e)(4). IRS Pub. 503.