Married people who are thinking of filing joint taxes while separated must consider the tax benefits and pitfalls. The pros and cons of filing joint taxes while separated are discussed in Chapter 9 of my book. Some of the factors that may affect the decision include: which tax bracket will apply; who will get the benefit of tax deductions and credits; and whether to take the risk associated with joint and several liability . When these factors are resolved, taxpayers must also decide how to allocate the tax refund, or pay the bill, when filing joint taxes while separated.
Under federal tax law, there are five tax different rate schedules. From the least favorable to the most favorable, they are:
- Married, filing separately
- Head of household
- Married, filing jointly
- Qualified widow(er) with dependent child
Spouses who are filing joint taxes while separated (MFJ) may take advantage of the lowest tax rates, while those who are married filing separately pay the highest rates. Single taxpayers pay low rates, but spouses who are separated do not qualify unless their divorce is final on or before the last day of the tax year.
When spouses file joint taxes while separated, they may pool their deductions. If spouses are physically separated, and they file separate returns, either of them may declare the itemized deductions for qualified residence mortgage interest and real estate taxes, provided that one of them would qualify. If they are divorced, it may become more complex. It is advisable to review the criteria carefully.
- Allocating estimated tax payments (quarterlies). If spouses made joint estimated tax payments but file separate returns, they may allocate the payments however they may agree. If they can’t agree, the payments will be allocated in proportion to their individual tax liabilities for that year.
- Allocating tax refunds. Refunds generated by joint income tax returns are issued in the form of a check in the joint names of both spouses (unless a direct deposit form is submitted). Overpayments from a joint return that are credited toward future separate returns will be credited to the spouse who overpaid.
- Allocating carryforwards (tax credits). Carryforwards resulting from capital losses that are reported on joint returns will be allocated to the spouse who incurred the loss if they subsequently file separately. If the capital loss was joint, the carryfoward will be allocated equally between the spouses if they file separately.
Often, spouses who file joint taxes while separated need guidance on how to divide a tax refund or contribute to the payment. Spouses should ask their accountant to provide a comparison; most tax preparation software can produce a comparison without much effort or cost. The comparison will show how much refund the spouse would have received, or how much tax they would have paid, if they had filed separately. If they agree to file joint taxes while separated, they should get as much refund as they would by filing separately, and contribute no more than they would have to pay if filing separately.
It is also prudent to consider the benefits of a tax indemnification agreement when filing joint taxes. Chapter 9 contains a sample agreement that helps to protect clients when filing joint taxes while separated.
For family law help in Western Pennsylvania, call Brian Vertz. He has represented business owners, executive and professionals – all kinds of people – with complicated child support and divorce issues. In Pittsburgh and Western Pennsylvania, call Brian at 412-471-9000.