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Gary Bode, CPA is a Master's Degreed, nation wide accountant offering tax and business services. Member of AICPA and NCACPA. Our virtual office provides excellent service to long distance and international clients. Call (910) 399-2705 for a free phone consult.

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Now that we're a few months past filing our taxes, I wanted to send you a quick THANK YOU!!!  We were so overwhelmed with our taxes when we reached out to you and really feel like you were a blessing to us during that stressful time.  Thanks again for all of your help, professionalism, and expertise!


 


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Divorce Issues with Form 1040 Tax Preparation discussed by a Wilmington NC CPA | Married Filing Separately

CPA Wilmington NC discusses Divorce Tax Issues

Gary Bode, CPA: We understand divorce tax issues. For a free initial phone consult, call 399-2705.

Divorcing? Every CPA sees harsh divorces that culminate in higher aggregate taxes paid to the IRS and NC.  Why?  Because, in the last calendar year before the final divorce decree, acrimony causes some couples to file using the Married Filing Separately status.  This is Box 3 on page one of Form 1040.  The Married Filing Separately status has considerable consequences for divorcing couples.

“Strictly from an aggregate tax liability perspective, divorcing couples should consider using the Married Filing Jointly status on the final IRS Form 1040.  Generally, it reduces the aggregate tax liability.  Unfortunately, sometimes acrimony makes that impossible.”
-Gary Bode, Wilmington NC CPA and Tax Accountant

Is it ever a good idea for divorcing couples to use the Married Filing Separately status?

Sure.  As CPAs, we always work a tax return both ways to see which way results in a lower tax bill.  In some cases, for example, splitting the itemized deductions Schedule A, will result  in a lower tax bill for one spouse.  If all trust and communication is gone, even using a CPA intermediary might make filing jointly impossible.  One common scenario CPAs encounter is one spouse having issues like unpaid federal tax liabilities, past due child support, past due debts owed to other federal agencies or past due legally enforceable state income tax obligations.  The other spouse is what the IRS calls an “Injured Spouse”.  Filing jointly would mean the entire refund, if any, would be offset by the IRS to pay these debts.  So Married Filing Separately would seem to make sense.  Except that the CPA can track each divorcing spouse’s tax liability and/or expected refund.  Form 8379, Injured Spouse Allocation, allows the IRS to NOT offset the Injured Spouse’s refund.

Examples of Detrimental Consequences of using the Married Filing Separately Status in Divorcing Couples

This list is not meant to be all inclusive.  The IRS tax regulations change in this area rapidly. Again, your CPA should work the tax numbers both ways to ascertain which is best under your particular circumstances.  Even the IRS publishes the following Special Rules in Publication 501. Per the IRS:

If you choose married filing separately as your filing status, the following special rules apply. Because of these special rules, you will usually pay more tax on a separate return than if you used another filing status that you qualify for.

1. Your tax rate generally will be higher than it would be on a joint return.

2. Your exemption amount for figuring the alternative minimum tax will be half that allowed to a joint return filer.

3. You cannot take the credit for child and dependent care expenses in most cases, and the amount that you can exclude from income under an employer’s dependent care assistance program is limited to $2,500 (instead of $5,000 if you filed a joint return).

4. You cannot take the earned income credit.

5. You cannot take the exclusion or credit for adoption expenses in most cases.

6. You cannot take the education credits (the American opportunity credit and lifetime learning credit), the deduction for student loan interest, or the tuition and fees deduction.

7. You cannot exclude any interest income from qualified U.S. savings bonds that you used for higher education expenses.

8. If you lived with your spouse at any time during the tax year:

a. You cannot claim the credit for the elderly or the disabled, and

b. You will have to include in income more (up to 85%) of any social security or equivalent railroad retirement benefits you received.

9. The following credits are reduced at income levels that are half of those for a joint return:

a. The child tax credit, and

b. The retirement savings contributions credit.

10. Your capital loss deduction limit is $1,500 (instead of $3,000 if you filed a joint return).

11. If your spouse itemizes deductions, you cannot claim the standard deduction. If you can claim the standard deduction, your basic standard deduction is half the amount allowed on a joint return.

12. Your first-time homebuyer credit is limited to $4,000 (instead of $8,000 if you filed a joint return). If the special rule for long-time residents of the same main home applies, the credit is limited to $3,250 (instead of $6,500 if you filed a joint return).

Post Divorce Issues

  • IRS Form 8379, Injured Spouse Allocation can be used to obtain your fair share of an IRS refund that was “offset” (snatched) to pay your, spouse or ex spouse’s, delinquent child support, defaulted student loan, etc.
  • IRS Form 8857, Innocent Spouse Relief sometimes can be used to avoid tax liability from a past Married Filing Jointly Form 1040 return when certain conditions exist.

We’re a Wilmington NC CPA firm that understands the heart wrenching consequences of the divorce process.  We strive to not add to that emotional burden by being empathetic and proactive.  If desired, we will work with both spouses.  The last calendar year of being married has significant tax consequences.  If you’d like a free initial phone consult with a Wilmington NC CPA and tax accountant experienced in divorce cases, please call (910) 399-2705.

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