Divorced Couples Walk Right Into These Tax Traps
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The stress that comes with ending a marriage goes far beyond divvying up the dinnerware and hammering out a child custody agreement. Tax season is rife with problem areas for couples navigating divorce, especially when things don’t end on the best of terms.
“Divorcing couples already have a lot of anxiety,” says Steve Mindel, family law attorney. “The hardest thing to do is get information from the other side if you’re in the middle of a divorce.”
That lack of communication–and oftentimes cooperation–is the quickest way to invite the IRS over for an audit.
Here’s where most couples get tripped up:
If you’re newly divorced and haven’t filed taxes as you read this article, you might want to get a move on it. First of all, there’s no telling how willing your ex will be to fork over his or her tax records, which could throw a major roadblock in your way. And if you’re relying on a CPA or tax preparer to play mediator, chances are high they’ll be too swamped this late in the season to field your last-minute questions.
Setting Yourself Up for Liability by Filing Jointly
Every couple has to decide whether to file as married (joint) or married (filing separately) after a divorce. There’s a big difference here, which is that filing jointly means you’re on the hook if your ex winds up in tax trouble. “You’re liable for everything on the tax return even if it’s related to your spouse,” Mindel says.
Note: When in doubt, file separately. You can change your filing status to joint after the fact, but a joint return can never be amended once it’s filed.
Bring On the Bills
Sometimes couples file jointly just because it’s far more expensive to prepare two separate returns–especially when CPAs and tax preparers come into play. Often, preparers will draw up a joint and separate return to compare the cost of each. “It’s not uncommon for two tax returns to cost a couple of thousand dollars more,” Mindel says.
Claiming Head of Household
When children are involved, deciding who’s able to claim Head of Household status in order to get the dependency deduction is a matter of simple math. By default, it goes to the parent who has custody more than 50% of the year. If both spouses try to file as HOH, that’s as good as rolling out the welcome mat to IRS auditors.
Tip: If there are multiple children, you can game the system a bit and agree to divvy up dependents on your returns (Example: if a couple has two children, they’d agree to claim one each).
This is the other half of the child deduction and can be tricky because one spouse can agree to “give” the dependency standard deduction to the other. For that to work, he or she has to file an IRS form 83-82, sign it and give it to their ex every year.
Spousal support is most often tax deductible for the person paying and counts as added income for the benefactor. There’s a chance to negotiate nontaxable spousal support during the divorce proceedings.
Choosing Where to File
In a perfect world, divorced couples would either sit down and bang out their taxes together or agree to use the same tax preparer. That way, the middleman would be familiar with both sides and they’d ensure your returns match up to pass muster with the IRS.
“The worst thing is to have the IRS come in and have both (parties) pointing the finger,” Mindel says. “In that scenario, the only one making any money is the IRS.”
If you’re worried your ex will try to work the system in his favor, your best bet is to file first, he adds. “Be the first person to file because then the other person will have to react.”
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