Tax time presents a unique set of challenges and considerations for those going through a separation/divorce in Doylestown, PA. There are various options to consider and pitfalls from which to steer clear. Although these concerns come to the forefront of people’s minds the closer it gets to April 15th, keeping the following in mind can improve your financial situation at various other points during the year as well.
Doylestown Divorce & Tax Filing Status
The most basic issue to consider is tax filing status – single, married filing jointly, married filing separately, or head of household. If a Doylestown divorce is finalized before the end of the calendar year, then husband and wife cannot file married jointly for that tax year; absent a remarriage in that calendar year, single and head of household are the only available options. For instance, if your divorce is final on December 31, 2014, you cannot file married jointly for tax year 2014, and that can pose a problem. More specifically, some couples may need to file jointly for a given tax year, for purposes of minimizing their overall tax liability, and, if that is the case, it is crucial that the divorce decree be held until the 1st of the following year (which would be January 1, 2015 for tax year 2014).
If a Doylestown divorce has not been finalized as of the close of the calendar year, the parties can choose how they want to file. For one, the parties can file jointly, notwithstanding their separation, because the IRS only considers the entry of the divorce decree to sever the marriage for tax filing purposes. Parties who continue to live in the same residence during their separation likely will choose this option, as their financial situation probably remains largely consistent with what it was before separation. That said, some parties still will not select this option due to secondary issues such as distrust over amount of claimed income, etc.
Parties who reside separately, on the other hand, most likely will not choose to file together, especially if there is a support order in place. The party who is paying support to the other will want to file separately for the purpose of claiming the paid support as a deduction, thereby lowering his or her taxable income, perhaps resulting in receipt of an income tax refund. Conversely, the party who is receiving support will have to claim the paid support as income, thereby increasing his or her taxable income, but there may be ways to offset this increase in income. For instance, if the recipient spouse is the primary custodian of one or more children, he or she may be able to file as head of household (a preferential filing status), as opposed to married filing separately (which is the least preferential filing status). Also, if the recipient spouse is the one paying for the mortgage and real estate taxes on the marital residence, then he or she can claim those paid expenses as itemized deductions, thereby reducing taxable income in that way. Parties with this type of arrangement should be careful about consistency between their respective returns to avoid triggering an audit: the amount of support paid/ received should match, and each party’s entitlement (or lack thereof) to the itemized deductions should be clear.
As indicated above, custodial arrangements can have an impact on the parties’ tax situation. The default IRS rule is that the custodial parent gets the benefit of claiming the child(ren) as dependents on his or her tax return. However, the parties can agree to an alternate arrangement that may prove more beneficial for both of them.
Consider the following scenario: Husband and Wife in Doylestown, PA are in the process of negotiating the terms of their support order. The Pennsylvania Support Guidelines are based on the parties’ respective net monthly incomes. The higher the obligor’s net monthly income, the greater the amount of the support obligation. Husband earns $150,000 gross annually, whereas Wife earns $30,000 gross annually, and Wife is the primary physical custodian of the parties’ two minor children. Wife is entitled to claim both of her children as dependents on her income tax return, however, by allowing Husband to claim one of children as a dependent on his income tax return, she increases Husband’s net monthly income available for support; this increases the amount of support that she will receive from him. Husband benefits as well because the income tax reduction he receives from the dependency exemption still exceeds the increased amount of support that he pays Wife. Essentially, everybody benefits, except the IRS.
As we’ve seen, tax is a complicated area of law, and most people can benefit from discussing their specific circumstances with a qualified attorney and/or accountant. The key is planning ahead.