IRS rules provide that if you are married on December 31st of the tax year, then you are still married for purposes of that year’s tax returns [Note – there is an exception to this rule where the spouses did not reside together for the last 6 months of the relevant tax year]. Similarly, if your divorce judgment is entered on the 31st of December, then you are considered single for that tax year and must file separate. Simply filing for divorce alone does not result in a change in your tax filing status.
Maintaining Status Quo or Taking an Alternate Course
The first question I ask my clients is “What have you done historically?” If the parties have always filed their taxes “Married Filing Jointly” then that very well may be the best way to continue to file taxes until the divorce is finalized.
However, the analysis doesn’t end there since the status quo may not necessarily result in the most tax savings possible. There may be instances where the parties get a better collective tax benefit by filing “Married Filing Separately.” In cases where it is uncertain which tax filing status nets the best overall benefit, I have my client request pro forma tax returns from his or her tax preparer under both filing statuses. The filing that nets the best benefit is then utilized.
Additionally, there may be circumstances where “Married Filing Jointly” nets the parties the best overall tax benefit, but I may still advise against it. Those scenarios are typically when there is a concern that the other spouse is not accurately and truthfully claiming all income. Because tax liability (tax, interest and any penalty) for an erroneously or fraudulently filed joint tax return can flow to both spouses, it is sometimes best for one spouse to forego any tax benefits from a joint filing to have peace of mind that no liability will be assessed to him or her personally for errors or omissions on the part of the other spouse.
Allocating Tax Liabilities and Refunds
The allocation of tax liabilities and refunds depends on many factors and is a case-by-case analysis. The final determination of what percentage of the refund is allocated to whom and who is liable for the tax bill (as well as the cost of preparation fees) is a result of negotiation or if the parties cannot agree, the order of the court. In short, a tax refund or liability is treated just like any other asset or liability of the marriage.
Filing income taxes incorrectly during a divorce proceeding can result in costly litigation and additional accountant’s fees to amend returns, which could result in any refund being quickly depleted. The best course is to have an initial conversation with both your attorney and accountant before filing so that the optimal path is chosen.