By Rich Streitfeld, CPA, CFE
If at all possible try to think and act as an economic unit, at least until the divorce is final. You are right – and you do need to have your financial needs met in a fair and equitable fashion. However when one party tries to grab all the income tax benefits at the expense of the other, all may lose out – less money for the kids, more money for the lawyers. For instance if Sharon refuses to sign a joint return while the divorce is in process and Greg makes more money, she may save $500 but he may lose $5,000. This may make Sharon happy, but may also make a settlement more elusive, drag out the proceedings and make it more difficult for Greg to provide for his share of any agreement. A better way? Sharon agrees to file jointly, but in exchange Greg pays her the $500 she would have received had she filed separately.
Thinking as one unit often means continuing to file “married joint” until the divorce is final. Why? “Married filing separate” brings higher tax rates and the loss of valuable tax benefits, especially related to kids and education. Itemized deductions, certain credits and the dependency exemptions have to be allocated– no, the tax service will not let both of you claim Junior or the interest on your mortgage. Own rental property? Your maximum loss may be 50% – or zero..
That said, there are situations where a joint return is not advisable, or simply impossible. You may be suspicious of your spouse’s business tax reporting or wary of being responsible for his pre-marital tax debts. You may have such a disparity in personal income that the benefits of joint filing are reduced or even eliminated. Or maybe relations are so bad between you that you cannot manage the details of splitting a joint tax refund – or payment, so you forego it altogether..
[Note: You can do this when you divorce (multiple years into the future) or each year when you both file your taxes (a single year); the form is the same.].
Who claims the child or children? Often couples will decide to alternate, even if one has actual physical custody. Sharon claims Junior this year, Greg takes him next year – and this is memorialized in their divorce agreement. In the eyes of the IRS, however, your divorce agreement is not sacrosanct and any dispute will be trumped by “facts on the ground”. So what does this mean?.
Next year arrives, they are divorced, and Sharon is upset that Greg is behind on paying child support. She decides to claim Junior on her taxes. Greg goes by their divorce agreement and claims Junior as well. The IRS disallows both deductions until it can determine who the “custodial parent” is. Greg submits the divorce decree; Sharon submits documentation that Junior stayed with her “the majority of the nights”. A few years ago the IRS explained that it would side with the actual custodial parent, regardless of the divorce terms. Sharon wins..
How could Greg have prevented this travesty – after all, he negotiated and planned for claiming Junior at least half the time. At the time of their divorce settlement, he needed to have Sharon (the custodial parent) certify her release of the child dependency exemption for those specific future years he would claim it by filing IRS Form 8332, and then attach a copy of the signed form to his tax return. Then she cannot override his exemption even if Junior was there 366 days. She has released her right to the exemption for that year..
Divorce and the IRS Tax Code – not to mention human relationships – are all exceedingly complex. Here are a few other issues to be aware of while you navigate this difficult process..
Rich Streitfeld is a Certified Public Accountant and Certified Fraud Examiner with Aaronson Lavoie Streitfeld Diaz & Co (www.alscpa.com) in Cranston, Rhode Island. He can be reached at (401)-223-0205 or firstname.lastname@example.org.