|
Tip
of the Month: In assessing after-tax cash numbers for divorcing clients, attorneys should be aware of the importance of Filing Status used in preparing tax returns. It has a significant impact on tax computations and is important because there are some special rules that are unique to divorce situations. This article will only focus on those aspects of Filing Status that generally pertain to divorce. There are 5 different filing statuses in the federal tax system:
Filing Status is important because each Filing Status has different:
Filing Status is determined by the marital status on December 31. The tax system considers a person to be unmarried for the whole year if there is a final decree of divorce or separate maintenance in place at December 31. State law governs whether the parties are married or legally separated. An Interlocutory Decree (not final) or Pendente Lite Order means the parties are still married for tax purposes. If the divorce is final, the parties must file as Single or Head of Household. If the parties are still married, they must file as Married filing a Joint return or Married filing Separate returns. However, there is a very important special rule that applies to a person who is not divorced but who has minor children living in the house. A married person may be eligible to file as Head of Household if the other spouse did not live in home for the last 6 months of the year. In that case, the non-custodial spouse must file as Married, Separate. An important element of being divorced on December 31 is that the non-custodial parent will then be able to file as Single and will be able to eliminate the Marriage Tax Penalty (see Divorce Tax Tips, November, 2002). The primary requirement to file as Head of Household is that the taxpayer paid more than ½ the cost of maintaining a home which was the principal home for more than ½ the year for the taxpayer and his/her child. Even if a person is still married, such person will be considered unmarried for tax purposes and will be able to file as Head of Household if:
A person who is Head of Household will not forfeit that Filing Status if he/she relinquishes the child dependency exemption to the other parent. Additionally, a person who relinquishes the child dependency exemption to the other parent does not forfeit the ability to use the Child Care Credit or the Earned Income Credit both of which are based on the fact that such parent is the custodial parent (can file as Head of Household). Tax Tips
The
last point is important and needs some explanation. It will be
the subject of the Tax Tip for April.
Federal Taxes Using Different Filing Status Assume an individual can claim one dependency exemption for a child under age 17 (is also eligible for Under Age 17 Child Tax Credit). Taxes for this individual will be different depending on the Filing Status the person is eligible to use. The taxes (using 2003 tax rates) for this individual at different levels of gross income are shown below: Federal Taxes at Different Gross Income Levels
*** Taxes of the person filing as Married, Separate will eventually be lowered as tax law changes from the 2001 Tax Act are implemented over the next several years. Under President Bush’s tax change proposal for 2003, the standard deduction for Single and Married, Separate would be the same in 2003 and the beginning income level for the 27% tax bracket (proposed to be 26%) would be the same for Single and Married, Separate. This would mean that an individual filing as Single or Married, Separate would pay the same tax at gross income levels up to $55,000. Over $55,000 the Married, Separate taxpayer would continue to pay more than the Single filer but not as much as under current law. |
