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.


Head of Household Requirements – 2013

November 26, 2013

taxesThere is no getting around the fact that divorce triggers lots of tax questions.  One of most befuddling of those new tax dilemmas for divorcing couples is the availability of the Head of Household filing status.  To clear up some of the mystery, here is some up-to-date information to help you decide what you should be negotiating for in your divorce settlement:

You can only claim Head of Household if:

You are unmarried or considered unmarried (see below under “Terms”) on the last day of the year,

  • You have paid more than half the cost of keeping a home for the year,** and
  • One or more qualifying persons lived with you in the home for more than half the year.

There are two exceptions to the residency requirement for temporary absences and for dependent parents:

Temporary Absences: During the period of temporary absences due to “illness, education, business, vacation, or military service,” the taxpayer and the qualifying person are still considered to be residing in the same household. To count as a temporary absence, “It must be reasonable to assume the absent person will return to the home after the temporary absence.  You must continue to keep up the home during the absence.” (IRS Publication 501)

  • Dependent Parent(s):  A parent can be a qualifying person even if the parent does not reside at the same home as the taxpayer.  The taxpayer must pay more than half the cost of keeping a home that was the main home for parent(s). (IRS Publication 501)

TERMS:

Unmarried: Taxpayer is legally separated (no such thing in Virginia), a decree of divorce/final order of divorce or a decree of separate maintenance has been issued by the court [IRS Code §7703(a)].

Considered Unmarried: A taxpayer may be “considered unmarried” for the purpose of qualifying for Head of Household tax status if:

  • he or she has a child, stepchild or foster-child residing at his/her home for more than half of the year for which he or she is entitled to a deduction (pursuant to IRS Code §151, 152) (even if deduction is given away with IRS Form 8332) [IRS Code §7703(b)(1)]
  • he or she provides for more than half the cost of maintaining a home for him/herself [IRS Code §7703(b)(2)], and
  • he or she is legally married, but has lived in a separate residence from spouse for the last six months of the year (July-December) [IRS Code §7703(b)(3)]

Deductions: A married person who files as Head of Household may choose either the standard deduction or itemized deductions (regardless of which method is used by the other spouse, if still married, which is the opposite of how the IRS does things when spouses file as “married filing separately” (where the two spouse’s choice of standard of itemized deductions must match).   (IRS Publications 501 & 504)

  COMPARISONS:

 Standard Deductions:

Single or Married Filing Separately: $5,950

Married Filing Jointly (or Qualifying Widow with Child): $11,900

Head of Household: $8,700

Tax Basis Comparisons

$30,000 Gross Income

Single 15%      HH 15%

$40,000 Gross Income

Single 25%      HH 15%

$50,000 Gross Income

Single 25%      HH 25%

$60,000 Gross Income

Single 25%      HH 25%

$70,000 Gross Income

Single 25%      HH 25%

$80,000 Gross Income

Single 25%      HH 25%

$90,000 Gross Income

Single 28%      HH 25%

$100,000 Gross Income

Single 28%      HH 25%

$125,000 Gross Income

Single 28%      HH 25%

$150,000 Gross Income

Single 28%      HH 28%

 

Posted by Elizabeth Downing Revell, Mediation Assistant and Robin Graine, JD, Virginia Supreme Court Certified Mediator

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.


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