When Should Married Couples Check ‘Married, Filing Separately’?

March 1, 2015

Graine Mediation is pleased to introduce Julian Block, JD as our guest blogger this week.  Mr. Block is a leading authority on tax planning for divorce and the author of Julian Block’s Tax Tips for Divorce, from which this article is an excerpt.

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Married couples need no reminder that they can benefit from joint filing when one mate earns all or considerably more of the income than the other. That tax break, though, can become a trap for spouses who decide to split, but don’t obtain a divorce or a legal separation. They still have the option to file jointly, assum­ing both partners are willing to do so. Nevertheless, one or both might find it more advantageous to file separately. The financial implications are huge.

Among other drawbacks for joint filers: they’re jointly and severally liable. That means married persons remain on the hook even if their marriage breaks up after they file a joint return. So if the IRS audits their return and demands extra taxes, it can dun either mate for the entire amount of any additional taxes, penalties and interest that becomes due.

Nevertheless, there are some drawbacks to filing separately. Whatever a couple’s reasons for avoiding tax togetherness, the two of them may be in for an unpleasant and expensive surprise when filing time rolls around. The taxes they’ll pay as married persons filing separately can be considerably more than the taxes they’d owe as joint filers or even as two unmarried persons.

There are other drawbacks for married persons who choose to file separately. One is that both of them must use Schedule A of Form 1040 to itemize their deductions for charitable donations and the like or that both must use the standard deduction.

Special rules for married persons living apart. Fortunately, there’s a way out of these traps for many married persons. An often overlooked break entitles them to be treated as if they were unmarried for the year in question—provided they fulfill certain requirements. The result: Even though they aren’t divorced or legally separated, they’re excused from having to use the rates for a married individual filing separately and, instead, receive the benefit of the more favorable rates for a head of household.

To take advantage of head of household rates, you have to pass a four-step test.

  •  Step 1: You file a separate return from your spouse.
  •  Step 2: Your spouse didn’t live with you at any time during the last six months of 2014. You and your spouse must live in separate residences, warns the IRS, and the courts agree. The Tax Court has ruled that a hus­band failed to qualify as a head of household when he and his wife agreed to live in separate areas of the same residence. Thus, living apart under one roof doesn’t pass muster.

In another dispute, the court reminded Laurel Hopkins that sharing the same quarters for as little as one day during the last six months of the year can be fatal. Before more than six months had elapsed during the year at issue, Laurel and her husband, William, had ceased to live together; but during the balance of the year, she sometimes let William stay overnight be­cause he was unable to find a dwelling.

As she paid all the household bills and was the sole support of their two children, Laurel, not unrea­sonably, believed herself entitled to file as a head of household. Unfortunately, in the course of a subse­quent IRS audit, Laurel let slip that William sometimes stayed in her apartment. On the basis of that admission, the feds determined that Laurel’s proper filing status was that of a married person filing separately. Though sympathetic to Laurel’s predicament, the Tax Court agreed with the IRS that a wife who shelters a homeless husband at any time during the last six months of the year disqualifies herself for head of household status.

 To avoid getting caught in an audit trap like Laurel, don’t chat yourself into loss of a tax break. Confine your answers to the questions raised.

  •  Step 3: You paid more than half of the cost of keeping up your home for 2014.
  •  Step 4: Your home was, for more than half of 2014, the principal residence of your child, stepchild or adopted child, whom you can claim as a dependent.

You aren’t necessarily disqualified from filing as a head of household just because you’re unable to claim the child. As the parent with custody—the mother, in most cases—you continue to be eligible, if you sign IRS Form 8332, which allows the 2014 exemption to be claimed by your spouse, the parent without custody.

When couples live apart by mutual agreement, they might be able to work out an arrangement whereby each spouse can claim a dependent child and each qualifies as a head of household. Congress enacted this special provision that treats married persons as unmarried individuals primarily for the benefit of abandoned wives (or husbands). But it worded the provision broadly enough to cover couples who have separated and who live apart by mutual agreement—without any actual abandonment.

Julian Block writes and practices law in Larchmont, N.Y. and was formerly with the IRS as a special agent (criminal investigator) and an attorney. He is frequently quoted in the New York Times, the Wall Street Journal, and the Washington Post, and has been cited as: “a leading tax professional” (New York Times); “an accomplished writer on taxes” (Wall Street Journal); and “an authority on tax planning” (Financial Planning Magazine). This article is excerpted from “Julian Block’s Tax Tips for Marriage and Divorce,” available as a Kindle at Amazon.com and as a print copy at julianblocktaxexpert.com. Law professor James E. Maule, a professor at Villanova University School of Law and Graduate Tax Program, praised the book as “An easy-to-read and well-organized explanation of the tax rules.” The National Association of Personal Financial Advisers says it is “A terrific reference.”

This blog and its materials have been prepared by Graine Mediation for informational purposes only and are not intended to be, are not, and should not be regarded as, legal advice.  This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship.  Internet subscribers and online readers should not act upon this information without seeking professional counsel.


Virginia Support Calculations – Comparing Child and Spousal Support

April 23, 2012

Divorce is extremely expensive. For most people in Virginia, raising a family in two separate homes (as many divorced people do these days) will cost one or both of you and your children plenty in terms of ability to maintain lifestyle and, even, to simply pay the bills. One of the primary ways that Virginia families make this all work is by the payment and receipt of support: Child Support and Spousal Support (Alimony).

Below is an outline to help you understand how these two methods of support work in Virginia.

(1) Child Support Calculations represent barebones, bottom line child support based on gross incomes, number or children, cost for health insurance and cost for work-related childcare.

– Parents can always choose to have child support be more than the calculations, and often do.

– Many parents, too, leave the basic child support calculation as is and share the cost at an agreed upon ratio (or have the wage earner pay) for particular items necessary for the children, e.g., expensive out of pocket medical care/therapy costs, extracurricular activities, camps, back to school wardrobes, Christmas Gifts, etc.

– Many parents also choose to have child support based on the guidelines and any additional support necessary for the family to be in the form of spousal support (tax deductible to the payer – more on this later)

(2) Spousal Support Calculations (pendent lite) are designed to be temporary amounts of spousal support to help get the non/lower earning spouse through that time period between separation and the actual divorce. (Courts do not want to have a full evidentiary hearing two times – once before trial and one at trial). However, many people chose to use these calculations as their spousal support amounts, particularly since they are calibrated for Fairfax County proper (unlike child support, which is state wide).

(3) Spousal Support is considered income to the receiver. It is taxable. It is deductible for the payer. It is important to understand that, when a parent receives spousal support, that amount is considered as her/his income for purposes of calculating child support; and, the payer of spousal support’s income is reduced by the spousal support amount. Thus, when there is an award of spousal support, the child support number changes (goes down).

(4) Child Support is always reviewable by the courts based on a “change in circumstances”, e.g. incomes go up, incomes go down, children’s needs change. (“The courthouse doors are always open for matters concerning children.”), whereas . . . )

(5) Spousal Support/Alimony may be reviewable depending on how the Settlement Agreement is written. Spousal Support is usually awarded for a specified period of time.

(6) Children receive child support for the duration of their minority (until they turn 18 years old, unless still in high school at 18. (In that situation, children continue to receive child support until they graduate, but not beyond their 19th birthday unless they have particular special circumstances. Adult children who are not able to live independent lives, too, may receive child support well beyond their 18th minority.), whereas . . .

(7) There is no set time for duration of a Spousal Support award. The “Rule of Thumb”, however, in cases where circumstances are such that spousal support is appropriate, is that it is awarded for 50% the length of the marriage (but that is not the law)

This blog and its materials have been prepared by Graine Mediation for informational purposes only and are not intended to be, are not, and should not be regarded as, legal advice.  This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship.  Internet subscribers and online readers should not act upon this information without seeking professional counsel.

3 Golden Rules of Visitation

April 23, 2012

Check out The 3 Golden Rules of Visitation Vlog and learn what’s most important when spending time with your children.


The Emotional Stages of Divorce

November 22, 2011

Everyone reacts differently to divorce. Most people, however, go through similar stages, much like grief. Just like after the death of a loved one, it is common to move back and forth between the stages. The tough part for the divorce mediator is that client-couples are rarely in the same stage at the same time.
When one party is ready to “get down to business”, while the other party is an emotional mess, it is the mediators job to slow the “ready” party down and allow the other party to catch up a little bit. It is important for both the husband and the wife to be able to keep up with the facts, information, proposals, etc., and to make sure that they are not too emotionally unstable to negotiate effectively.

Cathy Meyer, About.com Divorce News Editor, lists 6 emotional stages of divorce:

• Denial
• Shock
• Rollercoaster
• Bargaining
• Letting go
• Acceptance

For more detail about each stage please visit her article http://divorcesupport.about.com/od/copingandemotialissue/f/stagesofgreif.htm


Divorce & Taxes Series: Part 3

September 16, 2011

Tax Snippet #6 – Alimony (Spousal Support) has a Big Tax Affect; Child Support is a Wash.  It’s boon and bust with alimony.  Alimony is a boon to the payor, because it is deducted right off the front page of his/her 1040, thereby decreasing his/her Adjusted Gross Income (taxable income) by the amount of the alimony paid.3 Of course, that means that the receiver of alimony gets taxed on the money received, just as if it were ordinary income (like a salary).

In contrast, child support has no tax affect.  It is not considered income to the recipient or a write-off for the payor.  Instead, the IRS views the payment of child support simply as money spent for the support of one’s children – money that would have been spent on the kids whether or not there had been a divorce.  Therefore, the payor does not get to take a deduction for child support (like he/she would have for alimony) since it is usual and ordinary for parents to support their children with post-tax dollars from their employment with little opportunity for write-offs, etc.  Similarly, the recipient of child support does not have to categorize child support as income, for tax purposes, because child support is supposed to be used, as directly as possible, for the support of the kids and, of course, that money was already taxed at the payor’s end.

How does this matter to parents in the middle of a divorce situation?  My experience is that it matters a great deal – or, perhaps, should matter a great deal — to many people.  It can mean big dollars for some divorcing couples and is an excellent tool in the divorce settlement negotiator’s toolbox.  Determining how to divvy-up support between the child and spousal support sides of the ledger can add civility to financial settlement negotiations.  Why is that?  Because a positive tax benefit to one parent does not necessarily create a negative tax burden to the other.  It’s just does not always work that way.  Do the math with your accountant, bring it to the table, and you may be able to allow both parents to walk away with something good in the deal.

The Tax benefits to the payor of spousal support may turn a spouse, who is otherwise emotionally resistant to the concept of alimony, into a willing participant.  Many people do not like paying alimony.  It rubs them the wrong way.  A little massage by Uncle Sam, though, can turn that frown into a smile.

With all this negotiating over tax bennies and smacks, is the IRS standing by idly and waiting for your numbers to come in.  Of course, not.  Where there is play in the tax code, there is the taxman overseeing the game.  Be aware that questions bearing on whether dollars sent from one household to the other, post-divorce, are actually “alimony” or “child support”, are usually answered with the IRS’s default: “Child Support”.

As long as a legal amount of child support is clearly being awarded in a divorce case (in Virginia and most other states there are statutory guidelines that must be met), the characterization of support as “alimony” or “child support” is often negotiated in divorce settlement talks.  Be aware, however, as the IRS may not always agree with your and your ex-spouses characterization of support as “alimony” or “child support” regardless of how fair the two of you think the deal is.  And, they are the boss when it comes to taxes.  See Tax Snippet #7, below and, of course, your CPA, if there any questions on this slippery area of divorce tax.

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3A deduction is an exact dollar amount by which your gross income (income that is taxable) is reduced.  In other words, deductions lower the final amount of income that Uncle Sam can tax.  After subtracting deductions from gross salary (page 1 of your Federal Tax Return – Form 1040), the dollar amount remaining is referred to as your Adjusted Gross Income. (Other deductions include IRA deductions, certain educator expenses, health savings account contributions, student loan interest, moving expenses, and a few others.) Deductions are not the same as credits.  Credits are taken off the top of what you would have owed to the IRS if you did not have the credits.  Credits do not lower your taxable incomes.  Instead, they lower the actual tax bill owed to Uncle Sam. (Page 2 of your 1040) The IRS allows, as credits, certain child and dependent care expenses, the child tax credit, residential energy credits, and a few others.)  To further confuse you, the Fed’s also have one more deduction that has a different name: Exemptions.  Exemptions (page 1 & 2 of your 1040) include the tax breaks you receive for: (a)  just being a human being and; (b) for the other human beings who are your dependents (children, dependent relatives).

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Tax Snippet #7 – Don’t Mess with the IRS when it comes to Labeling Support as “Child Support” or “Alimony”.  Many parents feel that the minimum guidelines for child support in their state could not possibly meet their child’s needs, but the tax affect of child support (being a wash) does not sit well with the payor.  In these cases, divorcing couples often negotiate a division in the characterization of support into both camps: The Minimum Statutory Guidelines Amount = Child Support; The rest of the Support Money = Spousal Support.  This can often work well, financially, for divorced parents.  Beware, however, that the IRS does not always go along with parents’ tax planning decisions.

In particular, divorcing parents need to be careful where a big change in the amount of alimony is automatically triggered around the time (within 6 months) of a major event in a child’s life (such as graduation from high school).  In those cases, the IRS may very well re-characterize those alimony payments as child support and come looking for the payor to pony up.  Remember: Don’t mess with the IRS.  See your CPA and your divorce attorney.

These Tax Snippets are written based on my observations and experience.  I am and not a CPA, tax planner or tax attorney.  I am a mediator and former family law attorney. These are, however,  some of the key issues that I see over and over again with my clients.  This series of articles is intended to help you “get your feet wet” in this mucky area of divorce.  If you think any of these issues might affect you, see your tax professional for up-to-the-minute and personally-tailored tax advice.


Divorce & Taxes Series: Part 1

September 7, 2011

The thought of taxes is stressful enough, let alone when divorce becomes a factor.  To help you sort through this wildly misunderstood area of divorce financial planning, I will be posting several “Tax Snippets” over the next several days.

These Tax Snippets are written based on my observations and experience.  I am and not a CPA, tax planner or tax attorney.  I am a mediator and former family law attorney.  These are, however, some of the key issues that I see over and over again with my clients.  This series of articles is intended to help you “get your feet wet” in this mucky area of divorce.  If you think any of these issues might affect you, see your tax professional for up-to-the-minute and personally tailored tax advice.

Tax Snippet #1 – Filing Status Your filing status is a defining factor in determining your tax bracket.  Tax status is dependent on (1) your marital status, and (2) your parenting arrangements (if you have dependent children).  The choices are, in order of preference for most people (i.e., greatest tax advantages):

  • Married Filing Jointly
  • Head of Household (see “Tax Snippet #4)
  • Single
  • Married Filing Separately

Determining – and often times actively choosing — your tax status is very important.  The percentage of tax that you pay to Uncle Sam on your Adjusted Gross Income1 — 10 to 35% (with some exceptions) — is determined by your tax bracket.

Your tax status is determined on December 31st of that tax year.  Period.  It has nothing to do with April 15 or any other factors.  In other words, if you are divorced on or before December 31, you only have the tax status choices that single people have (single, head of household).  You lose the tax advantages that “married filing jointly” might offer for that tax year.

Don’t panic, though, if you are still married on December 31, but your spouse refuses to file with you or, on the other hand, if you decide that you don’t want to file with him/her for your own reasons.  If you are the main residential caretaker of your child(ren), there may be a less expensive way to present yourself to the IRS than as a “married filing separate” or “single”.  The IRS calls this “Head of Household” status.

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1Definition of Adjusted Gross Income (AGI): Your AGI is your gross, or total, income from taxable sources minus certain deductions.  Income includes salary and other employment income, interest and dividends, and long- and short-term capital gains and losses.  Deductions include some unreimbursed business and medical expenses, contributions to a deductible individual retirement account (IRA), and alimony you pay.  Your AGI serves as the basis for calculating the income tax you owe.  (See page one of your federal tax return.) Your AGI is then used to establish your eligibility for certain tax or financial benefits, such as deduction of your IRA contribution or qualifying tax credits (such as the child tax credit and the earned income credit).

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Tax Snippet #2 – Tax Advantages for Parents Lots of divorcing people get confused when it comes to the tax benefits of having children.  That is because, when they were married and raising children under the same roof, the tax benefits allowed were clear.  Upon divorce, however, the rules get very confusing.  Some of the key tax benefits of having children become “negotiable” upon divorce.  It is important for you and your soon-to-be-ex to figure out how your tax reality and your parenting arrangements relate to and affect on another.  Here are the key points to consider:

(1) The Dependent Child Exemption (a deduction):  Every member of a household potentially counts toward a tax-deductible exemption on the family tax return.  In 2011, each exemption will equate to a $3,700 deduction.  So, if you are single and claim the exemptions for 2 kids, you have 3 exemptions totaling $11,100 in deductions.  Whether or not you may claim your child(ren) as a dependent for purposes of utilizing the exemption is a point of negotiation in divorce settlements.  The primary residence of the child(ren) does not necessarily have to determine who can claim the child(ren) on their federal tax returns and custodial parents can give away the right to claim the child(ren) as dependents by completing IRS Form 8332.  (See your CPA for up-to-the-minute details.)

(2) Other IRS Benefits to Parent Claiming Dependent Exemption(s):  The party who claims the child(ren) as a dependent on his/her tax return (whether by default or pursuant to agreement and the completion of IRS Form 8332) is also the only parent eligible for other IRS benefits including, but not limited to:

  • The Child Tax Credit:  $1,000 per child, under the age of 17, with gradually reduced phase-outs that start at the following income levels:   $55,000 for married couples filing separately, $75,000 for single and head of household filers and $110,000 for married couples filing jointly.  In the phase-out range, the child tax credit is reduced by $50 for each $1,000 of income above these threshold amounts.
  • Certain College and Educational Credits: In 2010, there were two tax credits that apply to education: The American Opportunity Credit (which replaced the Hope Credit) and the Lifetime Learning Credit.  The American Opportunity Credit is worth up to $2,500 for each qualifying student, and is available during the first four years of postsecondary education.  The credit is phased out for taxpayers with adjusted gross incomes (taxable income “AGI” ) starting at $60,000 for single filers and $120,000 for joint filers.  The Lifetime Learning Credit is 20% of the first $10,000 you paid for qualifying tuition and related expenses each year.  The maximum credit for 2010 was $2,000.  Unlike the American Opportunity Credit, there is no limit on the number of years that this credit can be claimed; however, it is subject to the same AGI income phase rules as the American Opportunity Credit.

(3) Tax Benefits to the Primary Custodian (only!), regardless of who claims the exemption(s):

  • The Child & Dependent Care Deduction: If you paid someone to care for a child or a dependent so you could work, you may be able to reduce your federal income tax by claiming the Credit for Child and Dependent Care expenses on your tax return.  This Credit is available to people who, in order to work or to look for work, have to pay for child care services for dependents under age 13.  The Credit is also available if you paid for the care of a spouse or a dependent of any age who is physically or mentally incapable of self-care.  This federal tax credit can be worth up to 20-35% percent of the cost of day care (depending on your Adjusted Gross Income).
  • The Exclusion for Dependent Care Benefits: If your employer provides dependent care benefits on a qualified plan, you may be able to exclude those benefits from your taxable income.
  • The Earned Income Credit: This is a refundable tax credit that is given to qualified, modest-income taxpayers who have at least one child living at home.  The credit begins to phase out at $21,420 for married taxpayers filing a joint return with children and completely phases out at $40,463 for one child, $45,295 for two children and $48,279 for three or more children.  For married taxpayers filing a joint return with no children, the credit begins to phase out at $12,470 and completely phases out at $18,440.
  • Right to File as “Head of Household”: Filing taxes as “Head of Household” is also wholly dependent on which parent is considered the “primary custodian”, and IRS Form 8332 has no affect on this privilege.  (See Tax Snippet # 4)

The thought of taxes is stressful enough, let alone when divorce becomes a factor.  To help you sort through this wildly misunderstood area of divorce financial planning, I will be posting several “Tax Snippets” over the next several days.

These Tax Snippets are written based on my observations and experience.  I am and not a CPA, tax planner or tax attorney.  I am a mediator and former family law attorney. These are, however,  some of the key issues that I see over and over again with my clients.  This series of articles is intended to help you “get your feet wet” in this mucky area of divorce.  If you think any of these issues might affect you, see your tax professional for up-to-the-minute and personally-tailored tax advice.

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