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Death and taxes…the two absolutes in life. When it comes to being legally separate, although you may avoid death, taxes are something that you will have to understand and adjust accordingly.
Filing taxes after separation
Your filing status is used to determine if you must file a return, your standard deduction, and the correct tax. It may also be used in determining whether you can claim certain other deductions and credits. When it comes to the filing status you can choose, it also depends on your marital status on December 31 of the tax year.
The Internal Revenue Service (IRS) views a married person as being married for the whole year if they are separated but have not obtained a final decree of divorce or separate maintenance by December 31 of that tax year. Thus, if not legally separated by December 31 of the tax year, chances are you will file married joint or married separate.
The degree of how taxes will influence you after legal separation depends on factors such as if you have minor children from the marriage, child and spousal support orders, if you owned a home during the marriage, and of course, your filing status.
Married filing jointly or separately
When you are married, the two primary filing statuses are Married Filing Jointly and Married Filing Separate. Thus, the IRS disallows married couples to file as Single or Head of Household. One potential advantage of a legal separation is that individuals can only file jointly when they are married…and a legal separation doesn’t change your marital status (of being married). Thus, it is recommended that you seek the guidance of a tax professional when you are legally separated and have multiple filing options to select from.
If the decree of separation maintenance is obtained prior to December 31 of the tax year, the spouses will have the option of filing Single or Head of Household.
To file as Head of Household you are required to meet three specific tests including:
1. Being unmarried or considered unmarried on December 31 of the tax year.
2. You paid more than half of the costs associated with keeping up the home for the tax year.
3. A child or other qualifying person resided with you in the home for over half of the tax year (that person must be able to be claimed as a tax exemption by you or your spouse).
In the end, the common result is that tax rates generally get higher according to the tax filing status. Typically, married filing jointly has the best tax rates, followed by Head of Household, Single and Married Filing Separately.
Child support and spousal support
When it comes to support orders (child and/or spousal), there are certain considerations you will need to plan for. Child support, for instance, is not included in the taxable income of the person receiving the support…and is not tax deductible for the person required to pay it. Spousal support, on the other hand, is included as taxable income for the person receiving it…and is tax deductible for the person required to pay it (it is important to note that the IRS allows for the spousal support deduction if the spouses are not members of the same household and are legally separated, thus they can’t be legally separated and continue to live in the same home to realize the deduction).
Although child support isn’t taxable income, nor is it tax deductible, there are two tax considerations that may apply. The first is determining who will be the party to claim the child or children as their exemption when they file their taxes. When there is one child, this could certainly be a point of argument between the parties. When there are multiple children, though, it is not uncommon to split the child exemptions between the spouses. This approach, though, may not always be the best as when one spouse’s income is significantly higher than the others, splitting the exemptions could result in lost opportunities for tax savings. If you are facing this scenario, it is strongly recommended that you consult with a professional tax advisor to determine the best path.
In the end, there are many factors that you need to consider when it comes to taxes and your legal separation. Due to many of the matters being tied to the marital status on December 31, it is recommended that the parties take time to consider whether or not they should make their legal separation effective prior to or after the end of the year.