Should We File Joint or Separate Tax Returns?

Should we file joint or separate returns?

When you are in the process of a divorce, you may file a joint return only if you are married at the end of the tax year (December 31) and both of you agree. The box you check on your return is “Married filing jointly.” You qualify as married even if you are separated as long as there is no final court judgment ending your marital status. A temporary order relating to child support, alimony, or child custody does not affect your marital status. However, if the divorce is final as of December 31, you can’t file jointly—your filing status is either “Single” or “Head of household.”

Same-sex married couples and registered domestic partners or civil union partners cannot file joint federal returns under any circumstances. Couples living in states where same-sex marriage is legal or a marriage-equivalent relationship is available may file joint state tax returns.

Discuss the pros and cons of a joint return with your tax advisor and your attorney. Usually, but not always, your tax burden will be lower filing jointly, depending on your respective incomes, deductions, and credits. The main disadvantage of filing jointly is that both spouses are jointly and severally liable for taxes on the return, including any tax deficiencies, interest, and penalties. You can protect against this to some extent with 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 agreed to sign a joint return but is now refusing to do so. May I still file jointly?

Tax filing status can be used as a bargaining tool, because in most cases both spouses must agree to file a joint return. A court will not order unwilling spouses to file a joint return. In rare circumstances, the IRS will accept a joint return signed by only one spouse. If you want to ask the IRS to do this, consult a tax attorney.

If we file a joint return during our divorce, should we take any other steps to protect both spouses?

Make sure that your marital settlement agreement or judgment, or a separate agreement, addresses how you’ll deal with any tax liability or refunds. If a refund will be paid by check, make sure that the check is paid to both of you jointly or that you have a written agreement that the recipient will pay the other person for any share the other spouse is entitled to. If the refund will be made by direct deposit, have it routed to a joint account or prepare a written agreement. You don’t have to share tax liability or refunds equally. You can do whatever is fair and consistent with your overall property division, but whatever you do, have a clear written agreement. One common approach for dealing with taxes owed is to prorate tax liability using a ratio based on each spouse’s income.

If you are going to file taxes jointly and one spouse is responsible for preparing the returns, you should consider entering a stipulation (agreement) regarding tax indemnification. An indemnification agreement says that one spouse will be liable for any amounts due on previously filed joint returns, and protects the spouse who didn’t prepare the return. However, if you have doubts about your spouse’s ability to prepare accurate tax returns, you’re better off filing separately.

If my spouse and I don’t 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 allows you to claim the standard deduction even if your spouse itemizes deductions and allows you to claim additional credits such as the dependent care credit and earned income credit. You may also be taxed at a lower rate. For you to be able to file as head of household, all of the following must be true:

• You paid more than half the cost of maintaining your home for the tax year. Maintaining a home includes rent, mortgage, taxes, homeowners’ insurance, 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.

If you file as head of household, your spouse must 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.

When my spouse and I file separately, who gets the mortgage interest deduction and property tax deductions?

If the marital home belongs to one spouse as separate property, that spouse 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, unless the spouses agree otherwise. 

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

Generally, where the parties file separately, the parent with whom the children have lived for more of the tax year can claim the dependency exemption and the Child Tax Credit. 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. However, the parents can also agree to allow the non-custodial parent to take the exemption and the credit by signing IRS Form 8332, “Release of Claim to Exemption of Divorced or Separated Parents” or by making sure the marital settlement agreement or judgment releases the exemption and satisfies the wording of Form 8332. In some states, the court has the power to allocate the dependency exemption to the non-custodial parent in order to free up more money for child support. The Child Tax Credit can only be claimed by the parent who claims the dependency exemption. Generally, the spouse in the higher bracket should claim the exemption and compensate the other spouse for the shortfall.

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