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Is it illegal to divorce for tax purposes?

Have you ever been audited by the IRS? Maybe you own a small business and have trusted an accountant to do your taxes over the past few years, but he forgot to include some income of yours in your tax return from 2018. Now you’re starting to receive letters from the IRS telling you that your tax return was audited, and you now owe a couple extra thousand dollars in taxes. They’re asking for their money now and are telling you that they can withdraw that money from your checking account without your permission- if it comes to that. This is not a good position to be in, you figure.

The next thing you know, your wife has served you with divorce papers out of the blue. Not only was this unexpected but it has come at terrible time for you. This tax stuff is starting to get you thinking that you are in some trouble since you may not have the cash on hand to pay the tax bill you just received. A different tax preparer has confirmed that you owe this money to the government. Facing down a IRS audit as well as a divorce, you feel like you’re at wits end. 

Fortunately for you there are options to take advantage of. In most divorces people generally do not think that much about the tax implications of their getting divorced. Divorce is such a difficult process that your concerns would usually lie with your children, your retirement fund and maybe your house. Not only does someone like you have all of those same concerns but you also need to think a lot about what can happen in regard to your tax situation. 

In speaking with your tax preparer, she has talked to you a lot about how divorce can impact the tax situation of not only you but your spouse. While your wife is married to you, she has nothing to do with your business and did nothing wrong when it comes to paying the taxes associated with that business. You’ve asked yourself the question: can you counterpetition your spouse for divorce and state that you are doing so for tax purposes? Is it illegal to divorce your spouses for tax reasons, in other words?

Taxes and financial impacts from a divorce can be far reaching

You are smart to be concerned about the financial impacts of your tax situation and your divorce. Many people wander into a divorce not really knowing what to expect, and they walk out with a tax burden that can sometimes be surprising. Losing head of household status, keeping the same sort of lifestyle, dipping into retirement funds early to pay for an attorney and a host of other decisions can have a big impact on how your taxes are treated in any given year. 

If your thought would be to split up from your spouse based on a desire to not have her suffer the consequences of your failure to properly claim all your income in any given tax year, there can be a range of negative consequences for both you and your wife. In order to properly assess your tax situation you should place that goal at the top of your list and then work your way down. Thinking about your taxes early in your divorce can help you avoid problems later on and can help you and your spouse develop a game plan for negotiations, as well. 

What to about your taxes after the divorce has been finalized?

Let’s assume that you have successfully gotten your divorce and are now a single adult. It has been a long time since that has been true and you may be wondering about how to properly file your taxes the year after your divorce has been finalized. What is the proper filing status for you given the change in your marital status? The same question could be asked even if you are going through a divorce right now.

What you need to know in order to begin your analysis of this issue your tax filing status for any given year is based upon whether or not you are married on the last date of the calendar year (December 31st). If you are still married on that date then you will file as married when you prepare for your tax return. If you are divorced on that date then you will file as a single adult. You could have gotten divorced on December 30th or even on the 31st and the IRS will still consider you divorced for the entire year. 

What are the different tax filing statuses relevant to a divorcing person such as yourself?

  1. You can file as a single adult. This means that you are filing as a nonmarried person. In your situation you would only file as single if you have already gotten a divorce. Note that since Texas does not honor legal separation you cannot file a single even if you are no longer living with your spouse or consider yourself to be “separated.”
  2. Married filing jointly is likely what you have filed as during the time that you and your spouse have been married. This joint tax return would allow you to combine your incomes and base deductions and exemptions on your status as married persons
  3. Married filing separately. You and your spouse can file two separate tax returns if you choose to file separately. There are potential benefits to your choosing to do so if it results in you all owing less in taxes than had you filed jointly. What you may want to do is have your tax preparer prepare your taxes both ways and see which one benefits you all the most
  4. Filing your taxes as head of household means that you are likely not married but have children living with you a majority of the time. You must have paid a substantial amount of the costs of maintaining your household in which your children reside

Who gets the claim your children as dependents on their taxes?

This is often times a topic that creates a great deal of debate during divorce negotiations. The battle to be named as the primary conservator of your children is fought in order to determine not only the primary residence of your kids but a host of other issues- including determining which parent is able to claim the kids as dependents on their taxes. Sometimes final decrees of divorces do not even mention this issue as a right to be determined by the divorce. 

The real answer as to why many final decrees of divorce are silent on this matter is that it is not up to the family court judge. This is a federal matter that impacts all of us on a statewide level. So, you and your spouse will need to negotiate on which of you will become the custodial parent of your children within the divorce so you know what you can claim or not claim on your taxes. Only one parent can claim the children as dependents on your taxes. You cannot split the kids in two and you claim one and your spouse claim the other.

What about head of household status?

You probably feel like you are the head of your household as your divorce comes to a close and you begin your new life as a single adult. However, head of household is a technical term utilized by the federal government in relation to tax filing status. The way that you feel about being the head of household may not fit in with exactly how the law determines whether or not a person is actually head of household. 

There are advantages to being able to file as head of household on your federal income taxes. You can utilize a higher standard deduction and can open yourself up to being able to claim additional tax credits and have your income taxed at a lower rate. There are limitations as to when you can actually take advantage of this filing status, however. 

You need to have been divorced by December 31st for the year you are filing your tax return for. Next, you would have needed to have paid at least half of the costs of keeping up your home during that tax year and have your children reside with you for at least half the year. This is another area where being the primary conservator of your children is important. If you are not the primary caretaker for your children after the divorce you cannot claim head of household at least as it pertains to the children who were the subject of that divorce. 

Claiming a child as a dependent after divorce

Your children can only be claimed as dependents after your divorce by one parent. This has many important impacts on your case, specifically how you and your ex-spouse cannot both file your taxes as head of household and utilize your children to do so. The custodial parent, the one with whom your children reside primarily, is the only one who claim your children as dependents on their taxes. 

Your divorce decree probably will not address issues related to taxes unless you all bring that issue up to your attorney during the negotiation and drafting process. In other circumstances you and your spouse may have agreed to split custody with the children. This means that you all would basically split your time with the kids 50/50 meaning that neither of you has the kids more than the other. In situations like this the parent who earns more money would be able to claim the kids if he or she wants to file as head of household on their taxes. 

Are there any circumstances in which a noncustodial parent can claim the kids on their taxes?

If your child spends half of their nights with you and half of their nights with your ex-spouse then the court can state in your final decree of divorce that you all may alternate years in which you claim your children as dependents. However, if you are classified as the noncustodial parent then you would not be able to claim head of household status or any of the tax credits that are associated with being able to do so. 

The child tax credit is a credit that is an offset for the taxes that you owe in any given year. If you have a child who is under the age of 17 at the end of the previous year and has lived with you for at least half of that year, you would be able to claim the child tax credit. You must be able to claim that child as a dependent in order to take advantage of the tax credit.

Does having to pay child support impact your taxes in any way?

This is a question that I do receive with some regularity. If you are the noncustodial parent to your children then the odds are high that you will be ordered to pay child support as a result of your divorce. However, these payments have no bearing on your taxes for either you or your ex-spouse. You will not have to report your child support payments on your taxes. You would just report your income as normal and don’t decrease the income amount by how much you have paid your ex-spouse in child support. 

Questions about taxes and divorce? Contact the Law Office of Bryan Fagan

If you have any questions about the material contained in today’s blog post please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free of charge consultations six days a week. These consultations allow you to ask questions and receive direct feedback regarding your particular circumstances. We pride ourselves on offering exceptional representation to our clients in whatever family law matter they find themselves involved in. Thank you for your time. 

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