Tax Reform’s Impact on the Filing Status of Divorcing Couples

March 11, 2019

By Hubert Klein, John O’Grady, and Andrew Still

When couples decide to divorce, taxes are probably low on their list of things to worry about. Divorcing couples tend to focus primarily on the various emotional impacts of a pending divorces as well as the immediate cash-flow available post-divorce. However, tax status should really be closer to the top than the bottom of the list. The additional tax and financial impacts of a divorce carry serious consequences for the family that are often overlooked.  

When developing a list of financial priorities during the divorce planning process, the parties should place a higher emphasis on determining the impact of income taxes. Failure to recognize and establish a plan for personal income taxes post-divorce can often lead to negative financial outcomes for all parties concerned. By considering the impact of income taxes early in the divorce process, couples may better position themselves to mitigate future undesirable financial issues.

How Do You Determine Your Tax Filing Status?

When preparing to file a tax return, first determine your tax filing status. An individual’s tax filing status is determined by the last day of the tax year in which they are filing. For example, if the parties are still married on December 31, then they are considered married for the entire year. Likewise, if the parties are divorced on December 31, then the IRS considers the parties divorced for the entire year.

What Are Types of Filing Statuses Are There?

The following are tax filing statuses per the IRS:

SingleThis status is normally for taxpayers who aren’t married or who are divorced or legally separated under state law. Some states do not recognize legal separation. 

Married Filing Jointly – If taxpayers are married, they can file a joint tax return. If a spouse died during the tax year, the widowed spouse can often file a joint return for that year.

Married Filing Separately – A married couple can choose to file two separate tax returns. In some instances, this may result in less tax owed than if they file a joint tax return.

Taxpayers may want to run the married numbers both ways before filing. Depending on the range of emotions between the divorcing couples, sometimes choosing one status over another can result in a lower overall tax liability. However, choosing a joint filing status may rejected by one of the parties, and couples may choose married filing separately if each wants to be responsible only for their own respective tax liability. This is especially true if there are issues of unreported income or disagreement between the parties relating to various tax deductions.

Other questions of status that may have less of an impact on divorcing couples, but to nevertheless be aware of include:

Head of Household – This status typically applies to a taxpayer who is not married, but there are some special rules to consider. For example, a taxpayer who has paid more than half the cost of keeping up a home for themselves and a qualifying person may be able to elect the head of household status. Be sure to check all the rules so as not to mistakenly choose this status.

Qualifying Widow(er) with Dependent Child – This may apply to a taxpayer if their spouse died within two years of the tax year in which they are filing and they have a dependent child.

If couples are still married on December 31, they may need to figure out which filing status they want to choose. Divorcing couples should keep in mind that whether they are filing married jointly or married separately, they may share in any responsibility for any taxes due during the marriage (along with related penalties and interest, if applicable). And they may be required to share any and all tax return information with each other.

Divorcing taxpayers should consult their tax and legal advisor to determine the best course of action with respect to tax filing status.

And be sure to check out our companion article on “Tax Reform’s Impact on Alimony and Child Support.”

About Hubert Klein

Hubert Klein is a Partner and Practice Leader in the Financial Advisory Services Group with technical resources in various litigation actions. He has consulted in complex damages, business valuations and due diligence analysis.

About John O'Grady

Mr. O'Grady is a Senior Manager in EisnerAmper's Financial Advisory Services . He specializes in fraud and forensic accounting, business valuations, commercial damages assessments, and family and civil court matters.

About Andrew J. Still

Andrew Still is a Manager in the Financial Advisory Services Group where he specializes in complex litigation services, forensic accounting investigations, operational analysis and data analytics for cases involving bankruptcy.

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