Recently split? Avoid costly tax mistakes
The tax code makes unraveling a marriage even more complex.
NEW YORK (CNNMoney.com) - Tax season is no one's favorite, but it can be particularly onerous if you're newly divorced or separated.
Despite your angst and anger, you now have to think clearly if you don't want to make costly mistakes on your federal tax return.
One of the biggest decisions you need to make is which filing status you choose: married filing jointly or married filing separately. If you were separated but still legally married on Dec. 31, 2005, those are your only two options.
Figure out what you'd owe under both scenarios and understand the pros and cons of each strategy.
"It means a little more work but if it saves you thousands of dollars, then it's worth it," said Sharyn Sooho, a founder of DivorceNet.com and a family law attorney in Newton, Mass.
But don't do it alone. Work with a certified public account, enrolled agent or tax attorney, all of whom are qualified to represent you before the IRS and are more likely to inform you of the legalities of your tax situation than a generic tax preparer.
Why file separately?
Often, you're more likely to minimize your tax bill or increase your refund by filing jointly. But there are a few reasons you might want to file separately, tax experts say:
But keep in mind, if you file separately you forfeit some key credits and deductions, including the:
Earned income tax credit (EITC)
Child and dependent care credit
Adoption expenses credit
Hope and lifetime education credits
Qualified tuition deduction
Student loan interest deduction
Also, if you're collecting Social Security benefits, all of them will be taxable, Schmidt said. By contrast, if you file jointly, only a portion is taxed if your joint income exceeds $32,000.
Who deducts the kids?
In the absence of any written agreement stating otherwise, the custodial parent that is, the parent with whom the child lives -- normally takes the $3,200 dependency exemption when you file separately.
But if you're the noncustodial parent and you earned the most income it may make more financial sense for you to take the exemption. In that case, the custodial parent will need to sign a formal release giving you the exemption and you must attach that form to your tax return.
If such a release is granted, the custodial parent may not take the child tax credit on his or her return.
And if you think you can split the dependency exemption because your children live with each of you for half the year, think again. Only one parent can claim the exemption.
Lastly, unlike with alimony payments, child support payments are not deductible to the parent who makes them, nor is it treated as taxable income of the parent who receives them.
Tax-wise, you still have to work together
However much you may wish to sever or at least minimize ties to your ex, you need to work together tax-wise even if you file separately.
The reason: you must put your spouse's name and Social Security number on your return, so the IRS can match up both your returns to see if there are any discrepancies.
So, if you're filing separately:
If you file jointly, decide before filing your return just how you'll divvy up the refund or the tax bill.
If you've had very formal relations since your split or highly litigious ones you might want to put that agreement in writing and make it part of a court order, Sooho said. "Treat this with the same formality as you would any financial agreement."
Some couples opt to split the bill or refund 50-50, while others choose to pay (or receive) an amount proportional to their income. So if one person made one-third of the total income, they would pay one-third of the tax bill.
One small plus for all the aggravation tax season may cause you: you may write off any tax and financial advice you receive in relation to your divorce.