2020 has been a year of too many upsets, too many uncertainties, and too many confusions. Adding to this unsettling list are the unexpected tax questions that now arise for couples who had expected to be divorced in 2020. This group includes, but is certainly not limited to, the following:
- Those whose petition for divorce was granted in 2020 but who have not satisfied the wait period necessary to receive the decree of absolute divorce.
- Those who have not been to court due to the lengthy wait to receive a hearing date but have commenced with their divorce agreements (e.g., support payments, transfer of real estate, division of nonretirement assets).
- Those who have not been to court due to delay in securing a hearing date and are sharing income and/or responsibility for outstanding obligations.
Indeed it is difficult to categorize the many couples who have been affected by court closures, changes in procedures, and delayed hearing dates, not to mention timing delays due to the impact of pandemic-related changes (e.g., school closures, loss of employment, business closures). In this article we shall focus on questions related solely to filing 2020 taxes for separated couples who have filed or will be filing for divorce.
Joint Tax Filings
Couples whose divorce has not been finalized as of December 31,2020 retain eligibility to file joint 2020 returns. Certainly many will welcome this opportunity and may benefit, tax wise, from being able to file jointly. Still, there are decisions to be made.
- Couples should discuss and reach agreement as to whether they will be equally sharing liability for any taxes owed and /or equally share any refunds. Conversely should they allocate tax liability in proportion to income and likewise proportionately divide any refund? If they have been sharing income and liability for expenses, the decision to maintain joint responsibility for moneys owed and equal entitlement to refunds may be an easy decision.
- However, those who have been living as if they were divorced may want to consider adjustment of tax liabilities and/or apportioning refunds as they reflect each one’s income, including support paid /received and liability for expenses.
The following variables may be presented to the couple’s tax adviser for analysis
- Income of each party and prepayment of taxes
- Support paid and received
- Deductions for real estate taxes and mortgage interest credited to the individual making the payments
- Child-related deductions to the residential parent
- Taxes/deductions related to assets assigned to the “owner” party
- Pretax payments for retirement, health insurance and other payments credited to the payer
After analysis of all applicable variables, the tax adviser would calculate each party’s individual liability for taxes and/or entitlement to refunds.
Individual Tax Filings
- If one party has been designated as the residential parent, the couple may decide to consider the option of having the residential parent file as head of household (if living apart for 6 or more months) and the other parent as married filing separately. The goal here is to explore the different filing options and the tax ramifications of each one in order to determine the tax filing or tax filings which will yield the least total tax liability for the family. The parties can agree that they will share equally any tax liability generated by the individual filings and share equally refunds or agree upon a proportionate liability of the total tax liability.
- If the couple shares custodial responsibility, has lived apart for at least 6 months, and has more than one child, each party may be eligible to file under Head of Household status. Since this filing entitlement would be the same as it would be after divorce, the couple may decide not to make any adjustment or if they have been sharing income and/or liability for expenses, they may agree that the party who benefits shall pay to the other the sum needed to balance any discrepancy in the dollar outcome.