Sometimes life throws us a curve ball. Unfortunately, the world keeps spinning, and the tax world waits for no man (or woman for that matter). Here is a typical scenario –
“My wife and I separated last month, although at this point, we are not sure when a formal divorce agreement will be finalized. We have two children, ages 6 and 11. Although my wife currently makes more money than I do, we both contribute equally in supporting the kids financially. We try to share time with our children equally, but do not track this. We both contribute to paying our mortgage, and each hold 50% ownership.”
Filing status, child related tax credits and jointly held assets are hot topics with the IRS, as they are often mis-used or abused. Add to this the fact that it is simple for them to use social security numbers to match returns with respect to which parent claimed which child, and which parent filed under what filing status, and taxpayers must take great care in ensuring these situations are handled correctly.
Filing status –
If you’re separated but not legally separated or divorced at the end of the year
The IRS considers you married for filing purposes until you get a final decree of divorce or separate maintenance.
If you are legally separated or divorced at the end of the year
You must file as single for that tax year unless you are eligible to file as head of household or you remarry by the end of the year.
If you are legally married at the end of the year
You must file as married for that tax year and choose one of these filing statuses.
Married filing jointly: On a joint return, you report your combined income and deduct your combined allowable expenses. For many couples, filing jointly lowers their taxes.
In some cases, you may be relieved from liability for taxes owed on a joint return through tax relief for spouses.
Married filing separately: If you file separate tax returns, you report only your own income, deductions, and credits on your individual return. The rules are different if you live in a community property state. See rules for community property states. You and your spouse should consider whether filing separately or jointly is better for you.
Head of household: If you are married or legally separated, one of you may be eligible to file as head of household if all of these apply:
- Your spouse did not live in your home for the last 6 months of the year.
- You paid more than half the cost of keeping up your home for the year.
- Your home was the main home of your dependent child for more than half the year.
See below link for additional IRS FAQs on this.
https://www.irs.gov/individuals/filing-taxes-after-divorce-or-separation
Child Related Tax Credits –
With respect to tax credits, of primary importance here is which parent is considered the custodial parent of the child. The custodial parent is the parent with whom the child lived for the greater number of nights during the year. The other parent is the noncustodial parent.
- In most cases, because of the residency test, the custodial parent claims the child on their tax return.
- If the child lived with each parent for an equal number of nights during the year, the custodial parent is the parent with the higher adjusted gross income.
- Although the child may meet the conditions to be a qualifying child of either parent, only one person can claim the child as a qualifying child, provided the taxpayer is eligible. See below for a link to more information on how this situation is resolved.
Jointly Held Assets –
This may seem trivial, however this issue may become more important should itemized deduction thresholds decrease post the sunset of TCJA. Typically, assets related to an itemized deduction (i.e. – home mortgage interest) may only be claimed by an individual whose name is on the title. In the case of divorced or separated individuals who are both listed on the home title, each may only claim interest in proportion to their percent ownership of the home.
