For nearly 20 years of practicing as a New Jersey Divorce Lawyer, I have dealt with countless issues that inevitably involve potential tax consequences. Always, I preface my advise by advising my client to seek the advise of their accountant. However, many questions are of a nature wherein I can counsel my client.
For instance, during the pendente lite stage of the NJ Divorce (the divorce is on going but not yet finalized), I am asked, “how should we file.” Typically, I advise my client that it is always best to file their taxes in a manner that, “most benefits the marital estate.” In other words, if filing jointly would result in a refund (or larger refund), which is obviously what I shall recommend. However, if one of the spouses is self employed and there is a chance that some income may not be reported (i.e., cash), I will insist that the other spouse execute a Tax Indemnification Agreement before filing jointly. This way, if a tax audit were to occur down the line, I have protected my client and any liability shall be on the spouse who owns the business.
It is also clearly the law in a New Jersey Divorce that a judge of the Superior Court of New Jersey may not “order” a party (or parties) to file their tax return in any specific manner. This is all the more reason that my office always advises our clients to consult with their accountant. This, along with our legal advice, allows our clients to make a fully informed decision as well as ensuring that they are protected.
Regarding a global settlement of your NJ Divorce, the Internal Revenue Code can be very difficult to understand when going through a divorce. If you chose to hire an accountant to simplify the taxes and accounting associated with your divorce, many will say that no issues can arise. However, in order to avoid any tax filing issues, it is imperative to have a basic understanding of the common issues. This informative article will help you to understanding the two most important tax filing issues: filing status and exemptions.
When any party to a divorce goes to file his or her personal income tax return, it is mandated by law that he or she chooses a filing status. The purpose of requiring the taxpayer to select a filing status is to help determine the standard deduction and correct tax rates. The various status options are (1) single; (2) married filing jointly; (3) married filing separately; (4) head of household; and (5) surviving spouse.
The way marital status is determined is centered on the taxpayer’s status as of the lay tax day of the year. Therefore, if you are single on the last tax day of the year you file as single. However, what most people don’t know is that if you are single you may also file as head of household or surviving spouse, as long as it is in the year of your spouse’s death. Similarly, if you are married on the last tax day of the year you file as married. But again, what most married couples do not know is that they can either file jointly, separately, or even as head of the household. As a taxpayer, you have the option of choosing among the various status choices that correlate to your official status.
Although if you are single or married it is true that you can file as head of household, the following requirements must be met first before you are deemed the head of the household pursuant to the Internal Revenue Code:
- The taxpayer must be unmarried on the last day of the tax year or a married individual whose spouse was not a member of the household for the last six months of the year and who files a separate return;
- The taxpayer maintains, as his or her home, a household as the principal place of residence of a qualifying individual for more than one-half of the tax year; and
- The taxpayer provides more than one half of the support of the qualifying individual
- a) A qualifying individual is (1) an unmarried child (even if the child does not qualify as your dependent), (2) a married child who qualifies to be claimed as your dependent (or would qualify except for the special rules for child of divorced parents), or (3) any other relative for whom would qualify to be claimed as a dependent.
Exemption amount are always adjusted on a yearly basis for inflation. A taxpayer is entitled to receive an exemption for every individual in his or her family that qualifies as a dependent. Pursuant to the Code, Section 152(a), a person must meet five specific tests to be considered a dependent:
- Member of household or relationship test—in relation to the taxpayer, the individual must be a son, daughter, descendant of son or daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, father, mother, ancestor of father or mother, stepfather, stepmother, nephew, niece, uncle, aunt, son-in-law, daughter-in-law, mother-in-law, father-in-law, brother-in-law or sister-in-law. If the individual meets the relationship test and the remaining four tests, he or she does not have to be a member of the taxpayer’s household.
- Gross income test—with the exception of a child under 19 or a full-time student under 24, a person is disqualified as a dependent if that person has gross income equal to or greater than the exemption amount.
- Joint return test—a married individual will qualify as a dependent only if he or she does not file a joint return with his or her spouse.
- Support test—the taxpayer, either alone or together with others, must provide over half of the support of the person claimed as a dependent for the calendar year. If no one person provides more than half of the support for the calendar year, any person who actually provides more than 10% of the support can meet the support test under a multiple support agreement.
- Citizenship/residency test—the individual must be (1) a citizen or national of the US, (2) a resident of the US, or (3) a resident of a country contiguous to the US at some time during the calendar year. A non-resident alien child who meets all of the other tests will qualify for the dependent deduction.