Most married couples file their tax returns as married filing jointly. Why? Even if the couple is going through a divorce, the effective tax rate is usually lower than a filing status of married filing separately. Yet if your spouse does not provide you an option to file as married filing jointly anymore then you are automatically forced to pay more in taxes to the government. You likely did not budget to pay a higher tax bill this year or in subsequent years until your divorce is settled. So, what can you do?
If your divorce is not finalized you have the option to file your taxes under one of the 3 filing statuses:
- married filing jointly (requires both spouses to approve)
- married filing separately (can be a unilateral decision, no need to get your spouse’s approval)
- head of household (as long as certain conditions are met even if you are not divorced yet)
Let’s focus on the head of household status as the financial implications of the other two options are clearer. You may be able to file as head of household on your tax return, even though you are still married, if:
- Your spouse did not live with you during the last 6 months of the tax year
- Your home was the main home for the qualifying person for at least 6 months of the tax year
- You can demonstrate with evidence that you pay more than half of the household expenses
- You can claim your child as a dependent
- You file a separate tax return from your spouse
It is important to note, you must ensure you are in high compliance with the conditions noted above. Why? If you are not, the IRS can come after you in a big way. Filing separate returns as a married couple can, and often does, raise a red flag to the IRS. The IRS wants to review at a minimum that you are utilizing the appropriate tax filing status. Some people accidentally think since they are no longer filing a joint return they should file as a single taxpayer. Some people say to themselves “well I come close to meeting the conditions outlined above. The IRS will never know if I truly am in compliance or not”. Be very careful of thinking this way. Why? The IRS cannot only charge you a hefty penalty of 75% of your actual tax liability. Furthermore, if the IRS deems you filed a fraudulent return (i.e. knew you were not in compliance with the above conditions), the IRS could force you to go to prison for up to 5 years. All of this sounds pretty nasty and it is. The IRS does not fool around when it comes to these matters. So, make sure you have your evidence well documented to demonstrate you are in full compliance with the conditions outlined above.
Note: If you are not eligible for a head of household status, as you didn’t meet the required conditions noted above, you have one other option available to you. You can incorporate the additional tax burden inside your settlement structure. This approach requires you to have a sophisticated negotiator who knows how to negotiate divorce finance issues to ensure you receive the credit on your side of the ledger before you sign on the dotted line.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.