Should we file joint or separate returns?

You may only file a joint return if you are married at the end of the tax year (December 31) and
both of you agree to file and sign a joint return. 1 The box you check on your return is "Married
filing jointly." Same sex couples and domestic partners cannot file joint returns. You qualify as
married even if you are separated as long as there is no final decree terminating your marital
status. A temporary pendente order does not affect your marital status. However, if the divorce
is final and your marital status is terminated by the end of the tax year your filing status is either
"single" or "Head of household."

There are pros and cons to filing a joint tax return which you should discuss with your tax
advisor and your attorney. Generally, your tax burden will be lower although this will not always
be the case depending on your respective incomes, deductions and credits. The main
disadvantage of filing jointly is that both of you are jointly and severally liable for taxes on the
return, including any tax deficiencies, interest and penalties. This exposure can be partially
mitigated by executing a Tax Indemnification agreement discussed below. Also the IRS may
allow relief to a spouse who files jointly. The three types of IRS relief ("innocent spouse,"
"separation of liability" and "equitable relief") are discussed in IRS publication 971.


My spouse said they would sign a joint return but they are now refusing to do
so?

Spouses often use tax returns as a bargaining tool. Generally, a joint return can only be filed
where both parties agree and both sign the return. 2. A court will not order unwilling spouses to
file a joint return. 3. However, in rare circumstances the IRS will accept a joint return signed by
only one spouse where there is evidence of a clear intent to file a joint return and the non-
signing spouse does not file a separate return. 4.


Effect of filing status upon child and spousal support

In calculating guideline child and spousal support, the Court has to take into account "the
annual net disposable income of each parent" which is computed by deducting from annual
gross income, state and federal income tax liability after considering the appropriate filing
status, all available exclusions, deductions, and credits. 5. Therefore, your filing status as
"Married filing jointly," "Separate" or "Married filing separately" will have an impact on the
amount of support you pay or receive. In one case, the California Court of Appeal overturned
the trial court's decision where guideline support had been incorrectly based on husband's
status as "Married filing jointly" instead of "Married filing separately." 6.  If the parties calculate
guideline child and spousal support using a certified program such as "Dissomaster" and
incorrectly input that the parties will be filing jointly when the Husband payor should have been
filing as "Married filing separately" and the Wife as "Head of household," the Husband may well
end up paying less in child and spousal support because the program makes allowances for tax
liability.


If we file a joint return what precautions should we take?

First, make sure that any tax refunds are paid to both of you. If you decide to have any refund
sent to you by check make sure that the check is paid to both of you jointly. If a direct deposit is
sought make sure the refund is routed to a joint account. You should reach a clear agreement
as to how tax liability will be apportioned. A common approach is to prorate tax liability using a
ratio based on both spouses separate incomes. Another approach could be based upon what
each spouse would have paid if they had filed separate returns. Then to the extent a spouse's
share exceeds what he or she has already paid by way of salary or withholding or estimated
tax, that spouse would pay the difference.

Second, if you are going to file taxes jointly, it's a good idea to get your spouse to sign a
Stipulation regarding Tax Indemnification since both spouses will be jointly and severally liable
taxes on the return, including any tax deficiencies, interest and penalties. Even if the divorce
(dissolution decree) states that one spouse will be liable for any amounts due on previously
filed joint returns, the IRS may still hold both spouses jointly and severally liable and go after
either spouse.

Example of a Tax Indemnification Agreement

IT IS HEREBY STIPULATED by Wife and Husband as follows:
1. Wife shall immediately provide the Husband with copies of all records and documents
necessary for the preparation by Husband and his accountant of Joint Federal and State Tax
Returns (“the Tax Returns”) for the year ending _____. Parties acknowledge that the Tax
Returns will be prepared solely under Husband's direction and control.
2. Wife shall immediately respond to any reasonable requests for information from the Husband
or his accountant in the preparation of the Tax Returns.           
3. Wife shall sign the Tax Returns immediately upon presentation to her. Such signing does not
constitute an admission by Wife as to the accuracy of the Tax Returns.
4. In the event that the parties shall receive a Federal or State tax refund, the _____ shall
immediately endorse the full amount of the tax refund check to the ______.
5. The Husband agrees to release, indemnify and hold harmless the Wife from any Federal or
State claims, fines, liabilities, penalties and assessments arising out of the filing of the _____
Tax Returns, with the exception of any unreported income to the Wife that she failed to provide
to Husband and his accountant in preparing the Tax Returns.
6. The Husband shall pay all costs and fees of any administrative or judicial proceedings in
connection with the filing of the Tax Returns.

Be warned. Even if you have a Tax Indemnification Agreement it may not help you if your
spouse files for bankruptcy. If you have doubts about the accuracy of your spouse's, file
separately.


If you are still married at the end of the tax year (December 31) but separated
and your spouse will not file a joint return how should you file?

You must file either "Married filing separately" or as "Head of household" depending on your
circumstances. Filing as "Head of household" has the following advantages:

•        You can claim the standard deduction even if your spouse files a separate return and
itemizes deductions.
•        Your standard deduction is higher.
•        Your tax rate may be lower.
•        You may be able to claim additional credits such as the dependent care credit and
earned income credit that you cannot claim if your status is "Married filing separately."
•        There are higher limits for child care credit, retirement savings contributions credit,
itemized deductions.

If you are still married by the end of the tax year you can file as "Head of household" if you
satisfy the following requirements:

•        You paid more than half the cost of maintaining your home for the tax year. Maintaining a
home includes rent, mortgage, taxes, insurance on the home, utilities and food eaten in the
home.
•        Your spouse did not live with you for the last 6 months of the tax year.
•        Your home was the main home of your child, step child or eligible foster child for more
than half the year.
•        You could claim a dependent exemption for the child.

The other non-custodial spouse must then file as "Married filing separately." Once you are
divorced you may still file as "Head of household" if you paid more than half the cost of
maintaining your home for the tax year and your children lived with you for more than half the
tax year. There are different rules for filing as "Joint Custody of Head Household" and receiving
a credit against California State tames. 7.


If one spouse files "Married filing separately" do we take the standard
deduction or can we itemize deductions?

Consider this example. Bob who separated from Jackie but is still married at the end of 2005
decides to file "Married filing separately" in his 2005 taxes. He decides to itemize deductions
which are considerable. Jackie his wife does not have large deductions and wants to take the
standard deduction. The rule is that if Jackie qualifies as "Head of household" she can elect to
take the standard deduction or itemize. 8 If she does not qualify as "Head of household" and
Bob itemizes she must also itemize even if she has limited deduction. 9. This is true even if she
files before Bob and claims a standard deduction. She will have to file an amended return when
Bob claims itemized deductions.


When the parties file separately who gets the mortgage interest deduction and
property tax deductions?

If the marital home is the separate property of one spouse they can claim the deductions. If the
property is jointly owned, the spouse that actually pays the mortgage interest and property
taxes is entitled to take the deductions. 10. Other expenses are deductible to the spouse to the
extent that they are paid out of separate funds. If they are paid out of community funds each
spouse can deduct one half of the interest and taxes.


Who can claim the dependency exemption and the Child Tax Credit and the
Child Care Credit?

Generally, where the parties file separately it is the parent with whom the children have resided
for the longest period of time during the tax year that can claim the dependency exemption and
the Child Tax Credit ($1,000 for each child under 17). 11.  If the child lived with both parents for
the same amount of time, the parent with the highest annual adjusted gross income gets to
claim the child. It can therefore be important to keep a log of the actual amount of time the
children spent with you. However, the non-custodial parent may take the exemption and the
credit if the custodial parent signs an IRS Form 8332 "Release of Claim to Exemption of
Divorced or Separated Parents" or a divorce decree or separation agreement releases the
exemption and satisfies the wording of Form 8332. In California the court has the power to
allocate the dependency deduction to the non-custodial parent. 12. It may do this to maximize
support. The Child Tax credit can only be claimed by the parent who claims the dependency
exemption. 13. Generally, whichever spouse is in the higher bracket should claim the exemption
and compensate the other spouse for the shortfall.
The Child Care credit can only be claimed by the custodial parent if the other parent is not a
member of the household for the last 6 months of the tax year. 14. Unlike the dependency
exemption it cannot be traded although you may claim the credit even if the dependency
exemption has been allocated to the other parent.

                                                                                     
Footnotes
1.         Generally see IRS Pub 504 "Divorced or Separated Individuals" at www.irs.gov
2.        IRS Pub. 17, p.21. Available at www.irs.gov. 26 C.F.R. § 1.6013-1(a)(1)
3.         Marriage of Carlton & D'Allessandro (2001) 91 Cal. App. 4th 1213.
4.        In Riportella v. Commissioner, TCM 1981-463, Tax court held that Mrs. Riportella's failure to sign a joint
return was not fatal because she had signed joint returns for the previous two years, had signed a joint Form
4868 for an automatic extension, and had attempted to "sell" her signature for concessions in the divorce.
5.        Fam. Code, § 4059
6.        Marriage of Carlton && D'Allessandro, supra.
7.        See www.ftb.ca.gov
8.        I.R.C. 2(b)(c)
9.        I.R.C.  63 (c)(6)(a)
10.         Rev. Rul. 71-268.
11.        I.R.C. 152 (c)(4)(B)(i). IRS Pub. 501, p.12-13.
12.        Monterey County v. Cornejo (1991) 53 Cal. App. 3d 1271.
13.        IRC 24 (c)(1)(A).
14.        IRC § 21(e)(4). IRS Pub. 503.

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