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'How Should I File My Taxes?'
The timing of a divorce decree can make a big difference in the parties' federal income tax liability because their filing options are determined by their marital status at the end of the tax year. Under federal tax law, taxpayers who were married for 364.5 days but had their divorce decree entered on the afternoon of Dec. 31 are deemed to be single for that tax year. Parties whose divorce decree is entered on the first business day of the new year are married for purposes of filing the previous year's tax returns. Similarly, parties who are divorced or otherwise single during the year who remarry on Dec. 31 are married for purposes of filing their tax returns for that year. Parties who are still married and not judicially separated are married for purposes of filing their tax returns no matter how long they have been separated. IRC ” 6012-6013. It is important to give consideration to the client's filing options because filing status can produce considerable variation in the tax bill on the same income.
Options
Married persons have the option of filing joint tax returns, or filing separate returns as “married, filing separately.” Filing jointly generally produces the lowest overall tax liability, but exposes the parties to joint and several liability. See IRC ' 1 for tax rate schedules. The dramatic difference between the tax rates for married filing separately and single returns is generally referred to as the “marriage penalty.” Although the “innocent spouse” rules have been relaxed recently, a spouse who suspects that the other spouse may not be accurately reporting income or declaring deductions, or who has a substantial outstanding deficiency, may decide that the savings resulting from a joint filing do not justify the exposure to joint and several liability. It is important to note in this context that an indemnification clause in an agreement or order is not binding on the taxing authority but is enforceable only as between the parties. An indemnification agreement will afford little or no protection to a spouse of a delinquent taxpayer who is judgment proof. Nevertheless, for those who decide that a balancing of the risks justifies a joint filing, an indemnification agreement is helpful. See sample indemnification agreement, below.
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