When a couple ties the knot or gets divorced, taxes are probably not the first thing on their minds. But many decisions that couples make do affect their tax returns — and the amount they ultimately owe the federal government.
Here are some answers to some frequently asked questions about marital status and taxes.
Q. What if I get married (or divorced) during the year?
A. You’re considered married for the whole year if, on the last day of the year, you and your spouse meet any one of the following tests:
- You’re married and living together.
- You’re living together in a common-law marriage that is recognized in the state where you now live or in the state where the common-law marriage began.
- You’re married and living apart, but not legally separated under a decree of divorce or separate maintenance.
- You’re separated under an interlocutory (not final) decree of divorce.
Q. What if my spouse died last year? How is it handled on my tax return?
A. If your spouse died during the year, you are considered married for the whole year for filing status purposes. If you did not remarry before the end of the year, you can file a joint return for yourself and your deceased spouse.
If you have at least one dependent child you may be eligible to use qualifying widow(er) with dependent child as your filing status for two years following the death of your spouse. This filing status entitles you to use joint return tax rates and the highest standard deduction amount (if you don’t itemize). However, the status does not entitle you to file a joint return.
Q. If I am married, does it pay to use “married filing separately” status?
A. Many married taxpayers seem to think it would be advantageous to file their returns as married, filing separately, rather than as joint. However, only rarely does this filing method save taxes. You report only your own income, exemptions, credits and deductions on your individual return. But then, your spouse must also itemize.
There are other limitations. For example, in most instances you can’t take the credit for child and dependent care expenses, you cannot take the education credits, your capital loss deduction is limited to $1,500 (not $3,000), etc. On the other hand, there are some combinations of spousal income and deductions where married filing separately will save taxes. Best advice? Ask your tax advisor if filing separately would be beneficial.
Q. Can I deduct legal and accounting fees incurred in my divorce?
A. It depends. Certain fees may be deductible.
For example, tax planning advice related to the divorce and legal fees incurred in securing alimony may be deductible. But you’ve got to be prepared to show the relationship and the amount of the fees. That means any bills from your attorney, accountant, etc. should show a breakdown of the time and charges with details of the services rendered. Taxpayers are often denied deductions for attorney and accountant fees when invoices do not break out fees related to tax planning or taxable income.
Q. For tax purposes, is there anything I should do if I change my name due to a recent marriage or divorce?
A. If you changed your name after a recent marriage or divorce, take the necessary steps to ensure the name on your tax return matches the name registered with the Social Security Administration (SSA).
Here are five tips from the IRS for recently married or divorced taxpayers who have a name change.
- If you took your spouse’s last name — or if you hyphenated your last names, notify the SSA. When newlyweds file a tax return using their new last names, IRS computers can’t match the new name with their Social Security number. A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of your tax return and may even delay your refund.
- If you recently divorced and changed back to your previous last name, you also need to notify the SSA of this name change.
- To inform the SSA of a name change, simply file a Form SS-5, Application for a Social Security Card, at your local SSA office or by mail and provide a recently issued document as proof of your legal name change.
- Form SS-5 is available on SSA’s website at http://www.socialsecurity.gov/, by calling 800-772-1213 or at local offices. A new card will have the same number as your previous card, but will show your new name.
- If you adopted your spouse’s children after getting married and their names changed, you’ll need to update their names with SSA too. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number — or ATIN — by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return.
Q. What is the difference between an injured spouse and an innocent spouse?
A. When a married couple files a joint tax return, they are both “jointly and severally” liable for the tax — and any tax additions, interest and penalties that arise — even if they later divorce. They are also both responsible even if one spouse earned all of the income or claimed improper deductions or credits. This means the IRS can go after either spouse for the entire amount owed.
As you can imagine, this creates problems because one high-earning spouse could disappear and the IRS could pursue the spouse who is easier to find — but didn’t earn the money or cause the issues on the tax return. For these people, there may be “innocent spouse” relief. Under the rules, a spouse must prove he or she was unaware of the activities that caused the tax and did not benefit financially. If a spouse or former spouse qualifies, he or she will be relieved of the tax, interest and penalties on a joint tax return.
There are separate rules for “injured spouses.” You’re an injured spouse if your share of a tax refund shown on your joint return is applied (or offset) against your spouse’s legally enforceable past-due federal taxes, state income taxes, state unemployment compensation debts, child or spousal support payments or federal non-tax debt, such as a student loan. If you’re an injured spouse, you may be entitled to receive your share of the refund.
Sometimes Being Smart Isn’t an Advantage when it Comes to Dealing with the IRS
In one case, a spouse who signed a joint return tried to claim innocent spouse treatment. The court sided with the IRS in finding that even though she didn’t read the return, she had constructive knowledge of the data in the return.
The understatements on the tax return were substantial and the court noted that the spouse was not only well-educated, she had her own business and should have known there was a problem. Finally, the court found the spouse had a responsibility to review the return.