How to Maximize Tax Savings During
the Pendency of your Divorce through
Careful Selection of Tax Filing Status
The filing status for parties who are in the process of obtaining a divorce needs to
be considered as it has both economic and legal consequences. If a taxpayer is legally
married under state law on December 31st, the filing options are joint or
Married Filing Separately. Joint status is usually the most beneficial, but there may be
important reasons to file separately. For example, if one spouse is failing to report
significant income, the other spouse may not want to assume responsibility, as there is
joint and several liability for filing joint returns. Under certain circumstances, filing
as Head of Household may be an alternative for certain married individuals which can
result in better tax consequences than Married Filing Separately.
Married Filing Separately results in significantly higher tax rates than any other filing
status. For example, the 28% bracket begins at $21,175 for Married Filing Separately but
does not begin until $42,350 for joint filers, $33,950 for Head of Household and $25,350
for single filers. The standard deduction in 1998 is $3,550 for Married Filing Separately,
but this increases to $4,250 for a single filer, to $6,250 for Head of Household, and to
$7,100 for a joint filer. Also, if Married Filing Separately status is used, one spouse
can itemize only if the other spouse itemizes.
Generally, to qualify as Head of Household, a taxpayer must not be married as of
December 31st or be a nonresident alien. The taxpayer must maintain a household
which for more than half of the calendar year has been the principal place of abode of a
qualifying person that includes a taxpayer's child, grandchild, stepchild, foster child,
or adopted child.(1) The qualifying person does not have to
be the taxpayer's dependent, except if the qualifying person is married. Other relatives
living in the household can be a qualifying person if the taxpayer can claim them as
dependents. Temporary absences such as due to illness, education or vacation will not
disqualify the taxpayer from claiming Head of Household.(2)
However, there must be a reasonable expectation that the individual will return to the
residence.
A taxpayer must pay more than half of the cost of maintaining the household, including
expenses incurred for the mutual benefits of the occupants. This includes expenses such as
property taxes, mortgage, interest, rent, utilities, repairs, insurance and food.
Qualifying expenses do not include clothing, education, medical care or vacations.(3)
These rules can frequently benefit a taxpayer who is in the process of a divorce. The
taxpayer may be legally married as of the end of the tax (calendar) year, but may not want
to file a joint return and may not want the tax burden and cumbersome rules associated
with filing as Married Filing Separately. If the taxpayer meets certain tests, Head of
Household is a possible option for them.
A married individual is treated as not married for tax purposes if he or she has lived
apart from his or her spouse for the last six months of the tax (calendar) year and
maintains a home for a dependent child.(4) The child does
not have to be a dependent if the custodial parent waived the exemption pursuant to a
written declaration.(5) Note, this rule is more strict than
general rule which does not require the child to qualify as a dependent. Further, the
taxpayer must file a separate return and must pay more than half of the costs of
maintaining the household. In a temporary support situation, the husband may be ordered to
pay certain household expense such as mortgage, interest, and taxes. This may cause the
wife to lose the Head of Household benefits as she is not paying those costs. To avoid
this result, the husband may pay the wife, who in turn can pay the expenses. This rule is
often referred to as the "abandoned spouse rule". However, the requirement is
that the spouse not live in the same household for the last six months of the year.
Therefore, this rule can apply where the separation is "friendly".
The other spouse can file as Head of Household, if he or she can meet the same
qualifications. If the couple has two children, it is possible for both spouses to qualify
as Head of Household, except the same child cannot qualify both parents as Head of
Household. If the other spouse cannot qualify, he or she must file as MFS with its added
tax burden.
The opportunity for a married individual, in the process of a divorce, to save tax dollars
by filing as Head of Household should not be overlooked. The savings may not be as great
as joint filing, but Head of Household is definitely more beneficial than Married Filing
Separately.
