Tax Tips in Divorce

Tax season is upon us with a tax deadline of April 15, 2024. This means separated or divorced parties are trying to determine whether to file tax returns jointly or separately. Here are some quick tax tips for family law clients and practitioners related to filing 2024 taxes:

1. Make the determination early as to whether you are filing returns jointly or separately. Reach out to counsel to have that conversation now instead of waiting until the last minute, as the last-minute call will almost definitely result in filing for an extension.
2. If an extension is going to be filed, it is best to file the extension jointly. The reason is that if a party files a separate extension, the couple may not later file a joint return while extensions that are jointly filed permit the parties to still file a separate return.
3. Itemized deductions become more problematic during divorce. If the parties file separate returns and one party itemizes his/her deductions, then the other person is forced to do so as well.  This is true even if the party itemizing files his/her return after the party who took the standard deduction.
4.  Since Pennsylvania does not have a “legal separation” most accountants will advise clients that a single tax return may not be filed unless the parties are divorced. Individuals should check with his/her accountant to determine filing status.
5. Filing status also comes into play when the parties have children.  There are certain requirements necessary to file a tax return as head of household. Head of household status is generally more favorable than married filing separately, as the tax brackets are lower. By way of example only, a party seeking to file head of household must have lived in a separate residence from and after June 30 of the tax year. There are other requirements needed to qualify as head of household and those requirements are related to custody and providing support. Again, an accountant should be contacted to make sure the appropriate tax filing status is selected.
6.  In many cases, there are divorce, custody or support agreements addressing who can claim a child as a dependent. Certain forms must be completed to effectuate the assignment of the dependent to a non-custodial parent. This form should be signed far in advance of filing the return.
7. Assuming there is no agreement on who is claiming the dependent for tax purposes, the party who has physical custody is most often the person who qualifies to claim the dependent. If the parties share custody, the general rule is that the parent with the higher adjusted gross income is the person who claims the dependent.
8.  For spouses of self-employed persons, filing a joint return may be financially detrimental as you will be on the hook for any tax liability. The IRS does not care that it is not your business.  Many family law attorneys draft tax indemnification agreements which are signed by parties prior to filing a joint return. These agreements indemnify the non-income producing (or non-business owning) spouse from the other spouse’s tax liability. These agreements, however, are not binding on the IRS, and, in fact, the IRS will likely not even recognize the document.  The IRS is simply interested in being paid. The agreement, however, does provide some relief inasmuch as it allows the party who is indemnified to sue the other party for payment of the taxes in Family Court.

PLEASE NOTE THAT THIS BLOG IS NOT MEANT TO PROVIDE TAX ADVICE. ALL PERSONS SHOULD CONSULT WITH HIS/HER COUNSEL AND ACCOUNTANTS TO DETERMINE THE APPROPRIATE STEPS FOR PREPARING AND FILING TAX RETURNS.