Divorce Taxation – Part I

Originally published in the Pacific Grove Hometown Bulletin

June 6, 2012

Once in a while, I work with clients that are going through a divorce.  And once in a while in those once in a whiles, I work with clients who are both happily going through the divorce process, and seem to get along better than most married couples I know!  Most of the time, however, it seems to be a challenging and confusing time with a lot of mixed feelings on both sides.  Another aspect of divorce that can be challenging and confusing is the taxation in the years surrounding the divorce.

One of the most common themes I see with individuals going through divorce is that many tax issues are not even considered in the process.  People know it is a good idea to hire an attorney, but they forget to consult a competent tax professional about how it will play out, or what they may want to have their attorney negotiate on their behalf.  For many people they think the only tax consideration is who gets to claim the child, if one is involved.  In reality, there are several big issues to consider, and the tax law can sting those who are not aware.

In the next few issues I will go over some of the ground rules and areas of interest pertaining to taxation during a divorce including filing status options, community property laws, splitting income and deductions, crediting tax withholdings and estimated payments, allocating carryforwards, effects of children, transferring assets, and court orders.  It is also important to note that state law heavily governs divorce taxation.  I will be speaking from the perspective of California residents throughout the articles.

Filing Status

A basic question when going through a divorce is “What filing status should I use?”  The answer is that it comes down to your status on the last day of the year.  Taxpayers are considered unmarried for tax purposes if the final decree of divorce or a decree of separate maintenance is obtained by the end of the year.  If either of those two triggering events occurs, they would file Single or Head of Household returns as applicable.  Otherwise, they are still considered married and would file joint returns or Married Filing Separate returns.

One interesting exception, however, is that one or both individuals can claim Head of Household status while still married if they meet the Head of Household rules, and the spouses did not live together during the second half of the year.  These rules are sometimes referred to as the “abandoned spouse rules.” Many tax preparers are unaware of these rules, but they can be quite advantageous since divorcing individuals often do not want to file jointly, and Head of Household status is typically much better than Married Filing Separate.

To be continued next week…

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

1 comment so far

  1. Melissa on

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