2018 Tax Filings For Divorced Or Separating Couples Will Be The Most Complicated In Decades
BY: Stacy Francis
March 13th, 2019
Filing taxes can be complicated any year, but 2018 tax returns will win the prize for causing the most headaches. Due to the new tax law, my company has seen many questions from clients about how the new law will affect their finances and tax returns. For those of you who went through a divorce in 2018, you’re facing a whole lot of issues you haven’t had to deal with before, such as how alimony will no longer be deductible by the payor.
You must also keep in mind where you file your taxes. Despite the changes to the federal tax law, some states, such as New York, still allow maintenance to be deductible by the payor and taxable to the payee for state income taxes.
Here are the main things to consider as the tax-filing deadline approaches.
What filing status should I use?
Married Filing Jointly: Use when you are still married
You can file “married filing jointly” if you were legally married at the end of 2018 and did not obtain a final decree of divorce or legal separation by Dec. 31. This is true 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 you. Know that 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. You can sometimes get relief from ramifications of errors made by your spouse if you can qualify for “Innocent Spouse Relief” — but that is a big “if.” Be aware, it is not an easy process!
With “married filing jointly,” you will be on the hook for any tax, penalties or interest that arise from this tax return, even if you reported no income yourself.
Married Filing Separately: Use when you are still married
Another option is to submit your return using the “married filing separately” status. This status is also only allowed if you are legally married as of Dec. 31. The biggest benefit in filing separately is that you are held liable only for your own return’s accuracy and the payment of any taxes that result from your own income. Essentially, you are protected from what your spouse decides to report or not report on his or her forms.
As the saying goes, “There ain’t no such thing as a free lunch.” However, we know that most things in life are not free, and we usually expect there to be a catch. This is also true of filing “married filing separately.” There are many rules that come into play with this filing status that can have a negative impact on your taxes.
The “filing separately” status is typically the least advantageous, financially, of all the filing statuses as you are unable to benefit from certain lucrative tax breaks. According to the IRS, these include:
• Student loan interest deduction
• Tax-free exclusion of U.S. bond interest that you used for higher education expenses
• Credit for the elderly and disabled
• Child and dependent care credit, “in most cases, and the amount you can exclude from income under an employer’s dependent care assistance program is limited to $2,500 (instead of $5,000 on a joint return).”
• Earned income credit
If you have any reason to believe that your spouse will have a large tax bill or is not correctly reporting all of their income and deductions, the possible increased tax burn from filing separately may be worth it.
Head of Household: Use when you are still married, legally separated or divorced
Here’s where it gets a little more complicated. You can claim “head of household” if you are single, legally separated or divorced at the end of the year. There are lucrative perks that come with this filing status including a much larger standard deduction.
While the benefits are significant, there are several hurdles to clear to be able to take advantage of it:
• Living situation: You must have at least one dependent who has lived with you for more than 50% of the year. This requirement is waived if the dependent is a parent.
• Support: You provided more than half of the cost of maintaining your home.
• Right to claim: Even if you have the right to claim head of household, you will be prohibited if you gave your spouse the right to do so as part of your divorce decree.
• Separate return: You must file a separate tax return to take advantage of “head of household.” If your spouse filed married filing separately, the IRS will flag your tax return because neither you nor your spouse now qualify for the head of household status.
Do I still pay taxes on my alimony income, and can my spouse deduct them?
Prior to Dec. 31, 2018, the spouse paying alimony could take a deduction for the maintenance paid, while the one receiving payment was taxed on this income. The Tax Cuts and Jobs Act threw these rules out the window for any divorces that were inked after Dec. 31, 2018.
The confusion lies in that the new law has no impact on couples whose divorces were already finalized prior to the end of 2018. It is only those divorce decrees that are signed in 2019 that will no longer qualify for the tax break for the paying spouse. Alimony will now get the same treatments as child support always has. Alimony is not taxable for the recipient, and the payor cannot deduct the amount paid on their tax return.
With these changes, it’s especially important for people who have gone through divorce in 2018 or early 2019 to work closely with their tax-preparers to make sure they are filing their taxes correctly.