Tax rules and regulations can be confusing in the most routine years. But when you’re going through a divorce, it adds a whole new level of complexity (and anxiety) to the mix. In this article, we’ll answer some of the most frequently asked tax-related questions about rules, responsibilities, and relief for anyone going through, or having recently finalized a divorce.
The content in this article is intended to answer some of your questions about taxes and divorce. It is not intended as tax advice. Contact Carrington Smyth PLLC or your tax professional if you have questions regarding any of the information that follows.
Divorce and Taxes in Texas: Filing Status
If you’re filing your taxes while going through a divorce in Texas and you are or were still legally married as of December 31st in the year for which you’re filing, you must maintain your marital status. You can file as “married filing jointly” or “married filing separately” with each having pros and cons depending on your specific situation.
Married Filing Jointly
If you and your spouse can cooperate and work agreeably, filing jointly may be advantageous as it typically allows for various tax breaks, exclusions, credits, and a higher standard deduction. Couples working towards an amicable dissolution of their marriage via uncontested divorce or mediation may be better suited for filing jointly than those going through a more contested separation.
A Word of Warning if You’re Filing Jointly During a Divorce
While it comes with advantages, filing jointly also comes with certain risks that can be amplified during a divorce. You may reap the benefits of a higher return, but you may also be held responsible for paying taxes owed, whether or not your decree puts that responsibility squarely on your ex’s shoulders. Should they not live up to their responsibility, the IRS will come knocking on your door. Furthermore, if they make errors on a joint return, you could face the fines and headaches associated with a resulting audit.
Married Filing Separately
Choosing “married filing separately” can be beneficial if you can’t work productively with your spouse or if you think your spouse may owe taxes. Filing separately only ties you to the responsibilities of your own return, thus freeing you of any responsibility for your spouse’s tax debts.
Single or Head of Household
If your divorce is finalized prior to the last day of the year for which you’re filing, you may change your status to “single” or “head of household” if eligible. According to the IRS, you may be eligible to file as “head of household” if all of the following apply:
- Your spouse didn’t live in your home for the last six months of the year
- You paid more than half the cost of keeping up your home for the year
- Your home was the main home of your dependent child for more than half the year
Divorce and Taxes in Texas: Deductions and Credits
If this is your first divorce, you likely have questions about what’s taxable and what’s deductible when it comes to things like alimony, child support, and divided property. If you’ve been through a divorce before, you may have forgotten, or weren’t clear on these issues the first time around.
Is Spousal Support/Alimony Taxable and Tax Deductible in Texas?
Per the IRS alimony publication, spousal support, previously known as alimony, is tax deductible if the following applies:
- Payments are required by a divorce ruling
- You are not filing a joint return with the spouse in question
- The alimony is paid in cash, check, or money order
- Payment is not designated under the divorce decree as “not alimony”
- You and your spouse are legally separated and not members of the same household
- The payment is not required after the death of a spouse
- The payment is not treated as child support
An Exception to the Rule
Alimony payments ordered as part of a divorce ruling after 2018 are not tax deductible for the payor, nor are they viewed as taxable income for the recipient.
Claiming Children as Dependents if You’re Divorced
Whether you or your spouse claims your children as dependents on your taxes comes down to a few factors. According to the IRS, “Generally, the parent with custody of a child can claim that child on their tax return. If parents split custody fifty-fifty and aren’t filing a joint return, they’ll have to decide which parent gets to claim the child. There are tie-breaker rules if the parents can’t agree.”
Is Child Support Taxable or Tax Deductible in Texas?
No, child support is not tax deductible for the payor, nor taxable as income to the recipient.
Property Division and Taxes
When certain property is divided as part of a divorce decree, the taxable value of that property could change. Some examples include:
- Retirement Accounts
- Pensions
- Investments
It’s also important to note that you can incur tax penalties with each of the aforementioned examples if the transfer isn’t handled properly. You can also incur tax penalties if you took a disbursement from a retirement account to help pay for your divorce. A Carrington Smyth PLLC divorce lawyer can help with questions, or if you need a Domestic Relations Order.
Divorce and Taxes in Texas: Refunds and Responsibilities to Pay
Whether you’re getting back or giving back, the status under which you filed has a lot to do with what happens next.
What Happens to Your Tax Refund During a Divorce?
If you filed as married filing jointly, you can split the refund with your spouse. The IRS can send each person a separate check for their share of the refund.
If your status on your return was married filing separately, single, or head of household, you receive your tax refund as usual.
Speak with your tax professional if you have questions about how to split your refund if married filing jointly, or obtaining your refund under any other filing status.
What if You Owe on Your Taxes During a Divorce?
If filed as married filing separately, single, or head of household, you are responsible for your own payment if taxes are owed.
If you’re filing jointly and you owe on your taxes, you and your spouse are equally responsible for payment—even if your divorce decree only holds one spouse responsible for back taxes from previously filed returns.
If you find yourself in this situation, or if you’re facing an audit due to errors on behalf of your ex, relief may be available.
Divorce and Taxes in Texas: Relief and How to Qualify
The following types of tax relief are available with varying stipulations and qualifications.
Innocent Spouse Relief
Innocent Spouse Relief is intended to relieve you of back taxes owed on joint filings if your spouse incurred tax debt without your knowledge. To qualify for Innocent Spouse Relief, you must be able to prove your spouse or former spouse did any of the following without informing you:
- Incurred tax debt
- Did not report income
- Underreported income
- Fraudulently claimed deductions or credits
Providing sufficient proof to convince a court that any of this happened without your knowledge can be difficult. It’s highly recommended to work with an experienced family lawyer when trying to qualify for relief.
When do you need to file for Innocent Spouse Relief?
To qualify for Innocent Spouse Relief, you must file within two years of the initial IRS collection attempt.
Separation of Liability Relief
If you incurred tax debt while married and filed jointly, you may be able to qualify for at least some relief from that debt through Separation of Liability Relief. If you qualify, the IRS would only require you to pay the balance of the tax debt attributable to your income.
To qualify for Separation of Liability Relief, you must show that:
- You are no longer married or legally separated
- You and your spouse were not members of the same household during the 12 months prior to filing for relief
When do you need to file for Separation of Liability Relief? [h3]
Like Innocent Spouse Relief, you must file for Separation of Liability Relief within two years of the initial IRS collection attempt.
Equitable Relief
The third type of relief available is Equitable Relief. Under Equitable Relief, you’re basically trying to prove to the government that it would be unfair to hold you liable for any tax debt owed.
The IRS states that you “may” be eligible for Equitable Relief if you filed jointly and don’t qualify for Innocent Spouse or Separation of Liability Relief, didn’t transfer assets to commit fraud or avoid taxes, and didn’t knowingly file a fraudulent return.
However, you’re not eligible for relief in any year when:
- You signed an offer in compromise with the IRS
- You signed a closing agreement with the IRS covering the same taxes
- A court made a final decision denying you relief
- You participated in a related court proceeding and didn’t ask for relief
- You are not eligible for relief in any year when:
Learn more about Equitable Relief on IRS.gov.
When do you need to file for Equitable Relief?
To qualify for Equitable Relief, you must file your request during the collection period.
4. Injured Spouse Status Relief
If your share of a refund on your joint tax return was or will be garnished to clear a past-due debt that belongs exclusively to your spouse with whom you filed, you may qualify as an Injured Spouse.
To qualify, you cannot be liable for the debt, and you must have either contributed income reported on the tax return or claimed a refund.
When do you need to file for Injured Spouse Relief?
You must file for Injured Spouse Relief within three years of the due date of the original return (including extensions) or two years of the date that you paid the tax, whichever is later.
Contact Carrington Smyth today with further questions about tax rules, regulations, and relief available while going through a divorce in Texas.