Filing taxes is complicated every year but when you combine that with the uncertain process of going through divorce, the rules are even more complicated and confusing. Here are three key tax filing statuses to consider as the tax filing deadline approaches:
Married Filing Jointly – Use when you are still married
You can file using the “Married Filing Jointly” status if you were legally married and had not obtained a final decree of divorce or legal separation by December 31st. This is true even if even if you were living separately.
Most married couples file joint tax returns, but you should use the filing status that is most beneficial to your specific tax situation. If you sign a joint tax return, you are agreeing that everything on the tax return is correct and you will be accountable for any mistakes, errors, or intentional misstatements. If your spouse is found guilty of one of those actions, you can sometimes receive tax relief if you qualify for “Innocent Spouse Relief” – but be aware, this is not an easy process!
With “Married Filing Jointly”, you are both responsible for each other’s tax liability, meaning that you will be on the hook for any tax, penalties, and interest that arises from this tax return, even if all the income was generated by your spouse.
Married Filing Separately – Use when you are still married
Another option is “Married Filing Separately”. Just like “Married Filing Jointly”, this status is only allowed if you were legally married as of December 31st. The clearest benefit in filing separately is that you are only held liable for the accuracy of your own return and the payment of any taxes that result from your income. Essentially, you are protected from what your spouse decides to report — or not report — on their own forms.
But, as the saying goes, “There ain’t no such thing as a free lunch.” This adage refers to the idea that it is impossible for you to get something for nothing, and it holds true when filing “Married Filing Separately”. Many special rules come into play with this filing status that can have a negative impact on your taxes, thus increasing what you might owe to Uncle Sam. This filing status is generally perceived as being the least beneficial of all the filing statuses because separately filing, married taxpayers are not allowed to claim several lucrative tax breaks.
- Student loan interest deduction
- Tax-free exclusion of U.S. bond interest
- Tax-free exclusion of Social Security benefits
- Credit for the elderly and disabled
- Child and dependent care credit
- Earned income credit
- American Opportunity or Lifetime Learning educational credits
Head of Household – Use when you are single, legally separated, or divorced
You can claim “Head of Household” if you are single, legally separated, or divorced as of December 31st. There are lucrative perks that come with this filing status, including a much larger standard deduction ($18,650 in 2020). You are also able to earn more income before climbing into a higher tax bracket, saving you significant amounts of money that might have been paid toward taxes.
While the benefits are significant, there are several hurdles that stand in the way of taking advantage of this status:
- Living Situation – You must be a parent or have at least one qualified dependent that lives with you more than six months of the year.
- Support – You must provide more than half of the cost of maintaining your home.
- Have the Right to Claim – Check your divorce agreement. Even if you are qualified to claim head of household, you will be prohibited if you gave your spouse the right to do so as part of your divorce terms.
Going through divorce is never easy. One way to make the process easier is to know the tax filing options available to you. Be aware that certain qualifications may change a bit every year. You also don’t need to do this alone. If you need to, hire a CPA or qualified tax professional to help you file your year-end taxes.