Life Events

Tax Implications of Divorce, Separation, Marriage or Being Widowed

by
Gordon W. McNamee
on
11/12/2017
Tax Implications of Divorce, Separation, Marriage or Being Widowed

Marriage, divorce, separation, and widowhood all represent major life changes. Beyond their profound emotional impact, they can represent enormous shifts in our financial standing and status, not the least of which has to do with the way that it affects our taxes. How you’ll file when April 15th rolls around is likely the last thing on your mind as you’re going through your adjustment, it is by no means the least important. Marital status is a critical factor in calculating your tax obligation, and you need to be aware of and prepared for what your specific change will mean to you. Let’s take a look at some different scenarios. 

If you’re Separating from Your Spouse

Though separation can be devastating and upsetting, from a tax perspective it does not have to mean a major shift. Because a separated couple is still legally married, they can still file their taxes using the married filing jointly status if they wish to, or in some circumstances, they can choose to file their taxes separately. Families with children have specific details that need to be addressed. 

  • Head of Household Status – If spouses have spent at least six months living separately, either one or both can use the Head of Household filing status, but in order to do so they must have provided more than 50% of the costs of maintaining their household for a child, whether that child is a stepchild, a dependent child or a foster child. If one spouse has not provided this support does not qualify for using the status, and must file using the married filing separate status. The only alternative to this is for the couple to file jointly.

In many instances, one member of the couple will object to filing jointly. This is often because doing so makes both spouses liable for the tax obligation reflected on the return, regardless of who earned the income.  Concern about potential future tax liability in case of a divorce is often what stands in the way of separated couples filing jointly: even though IRS restrictions on legally married couples filing separately mean that the couple will collectively pay more in taxes, the legal aspect of joint and several liabilities can represent too great a financial risk.

  • Claiming Dependents – Another tax challenge faced by couples who are separated revolves around claiming a tax write-off for any dependent children. Legally speaking, the parent that has the child or children in their custody for the greater part of the year is the one that gets the tax benefits associated with claiming them on their tax return. Percentage of custody is calculated based upon the number of overnights the child spends at each household, even if a greater number of hours are spent at the other parent’s home.
  • Alimony – When a married couple has separated, it is common for one spouse to provide economic support to the other. These payments are known as alimony, and when a couple is filing separate tax returns they are viewed as income for the spouse that is receiving the payments. They are also a deduction for the spouse that is providing the payments. There is a difference between payments of child support and payments of alimony: child support is not viewed as income. A distinction must be made in writing as part of a separation agreement in order for alimony to be treated as income. Informal or voluntary payments can neither be written off and are not treated as income.
  • Community Property – Depending on what state a couple lives in, couples may need to split their income 50-50. If a couple lives in one of the nine states that are “community property states”, allocation of income may become complicated and individuals may be prevented from filing based solely on the amount of money that they themselves earn. The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

If You’re Legally Divorced from Your Spouse

Divorce represents an official and legal end to a marriage, and in many ways makes taxation issues much less complicated. Once a divorce is completed each partner’s income is treated separately and issues regarding who owns property and assets, who has custody of children and whether (and how much) spousal support will be provided has all been addressed. 

  • Filing Status – In filing your income tax, your marital status is based on whether or not you were married on the last day of the tax year. No joint returns can be filed by a couple after they have been legally divorced, which means that each has only two options until the time that either remarries: either file singly or as Head of Household. The rules for filing as Head of Household are the same whether you are separated or officially divorced: the individual must have provided more than 50% of the costs of maintaining the household for a dependent relative or dependent child during the course of the tax year. The only exception to this rule is if an individual is providing for a dependent parent who does not live in their home. There is no rule that says that only one ex-spouse can use the Head of Household filing status. If each individual meets the 50% requirement, then both are eligible.
  • Tax Deductions for Children – Most divorce agreements will provide instructions and details regarding which parent has custody and what the custody arrangement is. Parents often include agreements regarding claiming dependency for tax purposes, but in order for those arrangements to be honored by the Internal Revenue Service, Form 8332 must be provided to the agency to document a release of dependency that supersedes actual custody rules. This form can be prepared and submitted one year at a time or for multiple years, in which case it would need to be revoked if the arrangements or dependency benefit is to shift from one parent to the other. When the dependency arrangement is revoked, it is not effective immediately, but for the following tax year. When families with joint custody arrangements are unable to reach an agreement regarding tax dependency, the IRS uses a rule that calculates the number of overnights spent in each home, with the parent who has the greater number of overnights able to take the dependent child tax credit, as well as other advantages including higher education tuition credits and child care credits.
  • Alimony – Alimony payments are handled in the same way during a divorce as they are in a separation. They are specifically separate from child support payments and must be designated and documented within the divorce decree. Informal payment arrangements are not viewed as alimony, cannot be written off as a deduction by the ex-spouse providing the payments and are not to be calculated as income for the ex-spouse who receives them.

If You’ve Recently Married

Just as ending a marriage makes changes to your tax status, so does getting married. Married couples are required to file using the married status, though they have the option of filing as married filing jointly or married filing separately.  One way or another, the IRS requires that their incomes and deductions be combined, and has imposed numerous restrictions that make it less than financially optimal to use the married filing separately status.

  • Filing Status – Marital filing status is based upon the last day of the year. This means that even couples that get married on December 31st must use either a married filing separately or married filing jointly status for the entire tax year’s income. Though there are numerous tax advantages to filing using the joint status as opposed to the married filing separately status, under certain conditions there may be legal requirements for using the less advantageous status. Unfortunately, that is likely to mean higher tax obligations, as the IRS has imposed numerous restrictions to prevent married people from bypassing taxes owed by filing separately.  
  • Ramifications of Combining Income – One of the most challenging adjustments that the tax code presents to newly married couples is the requirement that incomes be combined. Doing so often means that married couples are thrust into higher tax brackets or are phased out of tax advantages that they were previously entitled to. Another outcome that is frequently encountered involves one or both members of a couple previously being eligible for premium supplements under the rules of the Affordable Care Act: where their solo income may have made them eligible for the supplement, combined incomes often change that, and may even require repayment of monies that have already been received.

If You’ve Recently Been Widowed

When your spouse dies, you are permitted to continue filing a joint tax return in the year that follows, and if you have a dependent child at home you are also able to use the more advantageous married filing jointly tax rates for a period up to two years following that unless you remarry. This exception alleviates the additional stress of increased taxes combined with any loss of income that may have been realized by the death.

When a major life change takes place, we tend to focus on the emotional and practical impacts and forget about the potential tax implications. For tax assistance with these or other considerations, contact a tax professional for expert guidance.

Gordon W. McNamee, CPA writes for TaxBuzz, a tax news and advice website. Reach him and his team at [email protected].

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Gordon W. McNamee

Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

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