Recently split? Avoid costly tax mistakes
The tax code makes unraveling a marriage even more complex.
By Jeanne Sahadi, CNNMoney.com senior writer

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:

  • You don't trust your ex. When you sign a joint return, you are equally liable for all taxes, penalties and interest owed. So if your ex won't pony up, the IRS can hit you up for the whole amount. There are ways around that liability – such as applying for innocent spouse relief if your spouse greatly understated his or her income and you had no way of knowing that when you signed the return. But that can delay the process considerably, said enrolled agent Lynn Schmidt of Winterhaven, Fla.
  • Your ex owes back taxes, back child support from a former marriage or has defaulted on federal student loans. If you file jointly under such circumstances, any refund you may be entitled to may be put toward your ex's debts.
  • One of you has a low income but very high deductions (e.g., major medical expenses). In this case, it may make more financial sense to file separately.

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:

  • You either both have to itemize or you both have to take the standard deduction, Schmidt said.
  • If you do itemize, coordinate who takes which deductions that you normally would have taken together as a couple. There can be no duplications, with one exception. In community property states (Arizona, California, Idaho, Louisiana, Nevada New Mexico, Texas, Washington and Wisconsin), you and your spouse may be allowed to split the deduction for allowable expenses that were paid for using money from a joint account.

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.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.