The key to determining which filing statuses you can use for your tax return is your marital status on the last day of the tax year. For example, if you are still married to your soon-to-be ex on December 31, 2011, then you can file your 2011 tax return as either married filing jointly or married filing separately. If you are divorced or legally separated on the last day of the year, then you must file either separately or as head of household.
Advantages of filing jointly
Filing a joint tax return can, but does not always, result in substantial tax savings for both you and your spouse. Depending on your circumstances, your income--or a portion of it--may be taxed at a lower rate if you file jointly. Also, a joint tax return may give you a higher standard deduction and may enable you to qualify for certain tax breaks, such as the child and dependent care credit, the earned income credit, or educational credits. Naturally, many divorcing couples find it tempting to file jointly while they still qualify to do so.
Advantages of filing separately
Despite the potential tax savings, filing a joint return can be extremely risky if you are in the midst of, or even contemplating, a divorce. On a joint return, both spouses are liable both jointly and individually for any tax due. This means that if your spouse hides income or claims improper deductions, the IRS can come after you--sometimes years later--for the full amount of the additional tax owed, along with penalties and interest. Since the divorce process typically is a time when trust is lowest, any divorcing spouse should think long and hard before filing a joint tax return, despite the potential tax savings.
Head of household option
If you are already unmarried, you can save a substantial amount of money by claiming head of household status instead of filing a separate return. Your tax rate usually will be lower than for people who file single. Also, you will receive a higher standard deduction. To file as head of household, you must meet a series of tests. For example, you must have paid over half the cost of maintaining a home for a qualifying person, such as a child, stepchild, or foster child, as defined by the tax code. It is important to understand the rules for determining who is a qualifying person, so be sure to consult with your tax adviser, or at least read IRS Publication 501, before declaring head of household status.
What to do if your spouse files jointly without your knowledge
All too often, one divorcing spouse files a joint tax return without the other spouse's knowledge or consent--sometimes using a fradulently obtained e-signature--and then pockets the refund. If you discover that your spouse has done this, don't just look the other way. The IRS does not accept a joint return filed without both spouse's signatures. If your spouse forged your signature on the return, then he or she has committed tax fraud. To protect yourself, you would be wise to file your own separate tax return for the same tax year. Then the IRS will have two returns, a joint return and a separate one, and your spouse will have a lot of explaining to do. If the IRS investigates your spouse's alleged tax fraud, the examiner will look into whether you consented to your spouse's signing of both signatures on the joint return. Under the tacit-consent rule, the IRS may determine that you provided consent if you have a history of consenting to joint returns.
Relief when you've been wronged
If the IRS tries to collect tax from you that you believe your spouse or ex-spouse should be held responsible for, you can claim an exemption as an innocent spouse. To do so, you must file IRS Form 8857. To qualify for innocent spouse relief on a previously filed joint return, you must prove that you signed the return not knowing, and not having reason to know, that the underpayment existed. You must also make a convincing case that, under the circumstances, it would be unfair to hold you liable for paying the tax. This is a high standard of proof, and the IRS gives you only two years from its first collection attempt to file the claim, so you should view innocent spouse relief as a last resort. If you do not qualify for innocent spouse relief, you may qualify for separation of liability relief or equitable relief. For more information about these types of relief, see IRS Publication 971.
Impact of the divorce decree on filing status
Sometimes the divorce decree specifically addresses tax filing status. If the divorce is early in the year, the decree may stipulate that the couple file last year's income tax return jointly. If the couple needs to amend a tax return already filed, the decree may require that they file the amended return jointly if the original return was filed that way. Or the decree may contain a general clause stating that one of the spouses will be responsible for any additional tax due on previously filed joint returns. When this happens, most divorcing couples assume that they must dutifully file their tax returns according to the terms of the divorce decree. This is a common, and often expensive, misconception. Because federal law supersedes state law, the IRS ultimately decides which filing statuses a taxpayer is eligible for and which spouse is responsible for paying back taxes. For tax purposes, the divorce decree is virtually irrelevant.
Importance of seeking tax and financial advice
Choosing the most appropriate tax filing status is just one of many critical tax and financial issues facing people who are going through a divorce. Unfortunately, few attorneys or judges are trained to give proper consideration to these matters. Therefore, it is imperative that anyone seeking a divorce consult with his or her tax or financial adviser. The potential benefits are worth far more than the cost.
This legal guide should not be construed as formal legal advice or the formation of a lawyer/client relationship.