07 Jan Filing taxes when getting divorced

Q. I’m getting a divorce but it won’t be final until 2016. We lived together for part of 2015. What are we supposed to do about our tax returns?
— Still married

A. Even with a pending divorce, you were married for all of 2015.

That means you have three options: married filing jointly, married filing separately, and if you qualify, head of household.

Married filing jointly is the preferred filing status for married couples, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

He said this filing status has the highest standard deduction.

“When you file jointly, you are each `jointly and severally’ liable for all taxes including future adjustments,” Kiely said. “This means if taxes are owed, the IRS can come after both of you or only one of you. It doesn’t matter who owes the taxes.”

Kiely offered this example. Let’s assume that you have a job where your employer withholds the right amount of federal income taxes each payday and sends you a W-2 at year-end. Your spouse, on the other hand, is self-employed. Self-employed people are supposed to make quarterly estimated tax payments. At tax time, you and your spouse file your taxes and pay the balance due. Two years later, you and your spouse split up and the IRS audits your spouse’s business and they disallow a whole bunch of deductions and assess $5,000 in additional taxes. Your spouse is broke so the IRS comes after you and they garnish your paycheck.

It’s unfair, but it can happen, Kiely said.

Married filing separately is the usual alternative to married filing jointly, Kiely said.

When using this filing status, each spouse files their own return and pays their own tax. They are responsible only for their own tax liability, Kiely said.

He said the standard deduction for married filing separately is $6,300 while it is double that for married filing jointly. The tax rates are slightly higher for married filing separately then they are in filing jointly, he said.

“In my experience, a couple rarely saves taxes when they file separately,” Kiely said.

Couples who want to keep their finances completely separate will frequently file separately. This could be due to a pre-nuptial agreement or a second marriage.

“Secretary of State John Kerry and his wife Teresa Heinz keep separate finances; they file separate tax returns,” Kiely said. “Other than that, the only time a couple would file separate tax returns is if their marriage is estranged.”

The head of household filing status is a possibility if you qualify.

“Normally head of household status is for single people who have dependents living with them in their home,” Kiely said. “The standard deduction for head of household is $9,250, which is significantly higher than single or married filing separately. The tax rates are also lower than single or married filing separately.”

In order for a married person to qualify for head of household status, Kiely said they must meet the following criteria.

1. You are “considered unmarried” on the last day of the year
2. You paid more than half the cost of keeping up a home for the year
3. A “qualifying person” lived with you in the home for more than half the year

You are considered unmarried on the last day of the tax year if your spouse did not live in your home during the last six months of the tax year, he said.

So which method should you use when filing your 2015 tax returns?

If your spouse is willing, you both should sit down with a tax advisor, Kiely said. The advisor can run the numbers to see how much you both will save if you file jointly.

“Frequently, a divorcing couple can’t agree on anything,” Kiely said. “This usually results in higher legal bills and paying more in taxes than they should.”

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This story was first posted in January 2016.