Should I file a joint personal income tax return with my spouse if we are separated and/or going through a divorce?
Here are the 7 things to know when filing taxes during divorce in Utah:
First, you may find it helpful to know that the divorce court cannot order you to file taxes in a certain way. Divorce courts can divide income tax returns or portions of tax returns between divorcing spouses, but the court cannot order you and your spouse to file jointly, nor can the court order you or your spouse to file separately. Income tax filing status is something the divorce courts do not have jurisdiction over.
As I researched this question, one of the best explanations I came across is written by Alden Wicker of LearnVest on March 4, 2014. The link to his full article is here, but I summarize the points that pertain to divorce and taxes below.
If you were married as of December 31 of the tax year in question, you can file as married filing jointly or married filing separately. If you were divorced before the end of the year, you cannot file your tax return(s) as married filing jointly or married filing separately.
Married filing separately is not the same as filing as a single person; it means that you are married, but each spouse files his/her own tax return, which means you don’t take legal responsibility for your spouse’s return, and your incomes and expenses are considered separately.
Most married people are better off filing jointly because it’s a lower tax rate. Married filing separately is the highest tax rate.
Still, there are at least seven situations in which you may want to consider filing separately (Mr. Wicker notes that, as with most things tax-related, these are just general guidelines, so if you think one of the following situations applies to you, you may benefit from going to an accountant or running the numbers with your go-to tax preparation software):
- You’re getting a divorce
Nine times out of ten, filing jointly—even though you are divorcing—still makes sense because by filing as married filing jointly you enjoy a lower tax liability.
However, sometimes divorce proceedings can get pretty acrimonious, and agreeing on how to split the refund, plus convincing your spouse to show up and sign some more paperwork might prove difficult. You still have to actually agree and sign the tax return. Rather than hassle with trying obtain your spouse’s cooperation, you may conclude it’s worth the financial hit to have control over your taxes by filing separately.
- You have significant deductions (and you don’t want to share the benefits with the spouse you are divorcing). For many deductions, the amount you can take depends on your adjusted gross income (AGI). If you and your spouse have unequal AGIs and you need to itemize significant deductions, it may make sense to file separately.
A common example (and one that arises in divorce frequently, I might add) is medical deductions. If your medical expenses for the year exceed 10 percent of adjusted gross income, you qualify to itemize medical expenses. If you and your spouse had an adjusted gross income of $250,000 and the two of you together spent more than $25,000 (10 percent of your combined income) in medical expenses, you can deduct them at all.
But what if you make $50,000 and your spouse makes $200,000? You then only need $5,000 in medical expenses to qualify to itemize as married filing separately. If you make less than your spouse, and have more potential deductions, it might make sense to file separately.
Other deductions tied to AGI (adjusted gross income) include miscellaneous itemized deductions like unreimbursed employee expenses, tax preparation fees, and gambling losses. Be warned, however: there are some deductions and credits that you are simply not allowed to take at all if you file separately, so consult an accountant to be certain.
- You don’t need or want to do a Roth conversion
Frequently, with all the financial upheaval a divorce brings, it’s not unusual to make new financial plans to adjust to divorce or to complete other financial plans you can no longer afford to put off. A Roth conversion may be one of these kinds of things. A Roth conversion is the process of changing a traditional IRA into a Roth IRA, and paying taxes on it the year the conversion is done. You cannot convert to a Roth if you file married filing separately.
- Your spouse’s tax refund will be taken by the government
Why would the government take your spouse’s return? The most common reasons are:
If your spouse owes the federal government money, the government might take his or her refund to help pay for the debt if:
- their tax returns are overdue or they owe previous tax payments;
- they have unpaid student loans;
- state income tax obligations or they have unpaid government guaranteed loans or unpaid Small Business Administration loans;
- your spouse may owe the government money in the form of unpaid child support to a former spouse
In situations like these (which often arise in divorce settings), if you file jointly, creditors leave nothing behind for you. You may consider protecting your eligibility to receive a refund from your spouse’s financial misfortune by choosing the married filing separately status.
- You earned a lot in capital gains and dividends
This is another situation that relies on unequal income between spouses. New for 2013 is how capital gains and qualified dividends are taxed. Capital gains rates rise from 15 percent to 20 percent after about the $450,000 level of joint income. If you are the spouse earning less income and also the spouse with the capital gains or dividends, it might make sense to file married filing separately.
- You have a lot of unearned income
Unearned income (income you did not work for) can include investment income, dividends, interest, capital gains or rental income. The Affordable Care Act created a 3.8% tax that applies to unearned income when you and your spouse make more than $250,000 combined. The threshold is $125,000 for married filing separate. If you are the spouse that has unearned income, and you make less than $125,000 on your own, it might make sense to file separately so you don’t pay that additional 3.8 percent tax.
- You want to legally protect yourself
When you file jointly, you sign the tax return indicating that you take legal responsibility for the whole thing, including any tax shenanigans your spouse might have gotten up to. The panic and malice divorce often stirs up can lead your spouse to play fast and loose with taxes and tempt your spouse to leave you holding the bag. If you don’t feel comfortable signing that tax return, then file separately to protect yourself from an IRS audit, fines, and penalties.