If divorcing your spouse is not difficult enough, those who are not legally divorced by December 31 must begin thinking at this time of year about tax planning as “married” individuals. The issue of tax filing becomes an entirely separate negotiation between lawyers and their clients. While individual tax returns are not due until April 15, tis the season now for tax planning with your accountant.
Here are three tips about taxes and divorce which should be discussed with your accountant:
- Tax Filing Status. Couples who are not divorced by December 31 are not eligible to file a tax return with a tax filing status of “Single.” Often parties are worried about filing a joint tax return, although it is the most beneficial tax status for most, because of the joint and several liability associated with a joint return. This means each person is responsible for the tax plus any interest and penalties due on the return. If one or both parties are unsure about filing a joint return, they should consider filing separate tax returns as allowed for married people, which can be subsequently amended to a joint tax return. Once a joint tax return (or joint extension) is filed, this choice cannot be later amended to allow filing separate returns.
- Separate Tax Returns. If separate tax returns are filed, each person must report one half of the other’s community income. The filing of a separate tax return will also allow the payor of spousal support to deduct the payments made pursuant to a court order, or other written agreement meeting the IRS requirements. The recipient of any spousal support will need to report this support as taxable income. If a joint return is filed during the divorce, the tax deductibility/inclusion of any spousal support payment is lost.
- Deductibility of Attorneys’ Fees. Attorneys’ fees and other litigation costs are deductible to the extent they are incurred to produce taxable income. This deductibility is allowed where the fees and costs exceed 2% of the taxpayer’s adjusted gross income and are subject to a phase-out at a certain level. Fees paid in connection with a divorce are not a deductible business expense.
In the words of The Beatles, “Should five percent appear too small, be thankful I don’t take it all ‘cause I’m the taxman, yeah I am the taxman.”