If your divorce was finalized in the middle of a tax year, you will inevitably face questions ranging from your filing status to the proper treatment of various income and expense items for the period you were married. For instance, how do you handle mortgage interest and property tax paid on a jointly owned home? Or what do you do with interest income from a joint savings account or an account that was transferred to your spouse? The answers depend on where you live. If you live in one of the nine community property states, all income and expenses are considered to be earned or paid equally. If you live in an equitable distribution state, income and expenses may be handled differently. This article will address the tax treatment of some common forms of income and expense in equitable distribution states.
Your filing status is determined as of the last day of the calendar year. You are considered unmarried for the whole year if, on the last day of your tax year, you are unmarried or legally separated from your spouse under a divorce or separate maintenance decree. Your filing status will be either single or head of household.
To benefit from the more advantageous rates under the head of household filing status on your tax return you must meet the following criteria:
Section 61 of the Internal Revenue Code requires a taxpayer to include in gross income all income from whatever source derived. Taxation of the income from jointly held property is determined in accordance with state law for deciding who is entitled to the income from the property. If each spouse has an equal right to the income from the property, the usual rule is that one-half of the income from the property is properly taxable to each spouse.
In general, you must report one-half of the dividends and interest from joint assets until the date the asset is transferred to either you or your spouse. However, in reality, one of the parties may receive the income-generating asset and all income earned thereon during the year. Consider the following:
You and your spouse owned a joint investment account. During your marriage, all dividends were reinvested. As part of your settlement, the entire account is transferred to your spouse, including the accumulated income. Because your name was listed first on the account, you are issued Form 1099 for the period of time before the account was transferred.
Report the full amount of the dividends and interest on Schedule B of the 1040. [On the line immediately below enter “Paid to nominee and your spouse’s social security number” and show the same amount of dividends or interest as negative number. Be sure to inform your ex-spouse of the amounts he or she is required to report as the nominee.
Generally, each former spouse can claim the itemized deductions he or she actually pays. And expenses paid from a joint account would be deductible in equal parts by each former spouse. But there are some special rules and the provisions of the divorce decree or legal separation agreement have to be taken into consideration.
Home mortgage interest is generally one of the most significant itemized deductions. For a home that is in the name of just one of the spouses, only that spouse could claim the deduction for home mortgage interest for the period they are married. If the home is jointly owned and the mortgage is paid from a joint account, the deduction for mortgage interest can be split equally between the spouses for the period of the marriage.
The deduction for home mortgage interest and real estate taxes for the post-divorce period of the year will be determined by the terms of the judgment or settlement agreement and the form of ownership following the divorce. If the home continues to be held in some form of joint ownership, either as tenants in common or joint tenancy, you and your spouse are both entitled to take deductions for half of the mortgage interest and real estate taxes. However, if the entire interest in the marital residence is transferred to one party as part of the settlement, only that person can take the mortgage interest deduction.
Depending on your income level, medical expenses may constitute another significant itemized deduction. According to the IRS, if medical expenses are paid from a joint checking account, each former spouse could claim half the expenses. Each former spouse could also deduct the medical expenses paid separately for him or her, for the other spouse, and for dependents. To include medical expenses paid for your spouse, you must have been married at the time the medical services were received or when the expenses were paid.
For other itemized deductions, such as charitable contributions, you would generally be able to claim the expenses you paid individually and half the expenses that were paid from a joint account while you were married.
If you and your spouse made joint estimated tax payments for the year of divorce, either of you can claim all of your payments, or you can divide them in any way on which you both agree. If you cannot agree, the estimated tax you can claim equals the total estimated tax paid times the tax shown on your separate return for the year of divorce, divided by the total of the tax shown on your return and your spouse’s return for that year. Although not necessary, you may want to attach an explanation of how you and your spouse divided the payments.
If you claim any of the payments on your tax return, enter your former spouse’s social security number in the space provided on the front of Form 1040 or Form 1040A. If you were divorced and remarried in the same year, enter your present spouse’s social security number in that space and enter your former spouse’s social security number, followed by “DIV” to the left of the line on Form 1040 Form or 1040A for estimated payments.
If you and your spouse filed a joint return in the year prior to divorce and applied an overpayment of tax to the year of the divorce, the overpayment must be allocated between you and your spouse. Application of overpayments is treated the same as estimated payments. Either of you can claim all of your payments, or you can divide them in any way on which you both agree. However, if you cannot agree on the allocation, the overpayment you can claim equals the total overpayment paid times the tax shown on your separate return for the year of divorce, divided by the total of the tax shown on your return and your spouse’s return for that year.
If you filed joint tax returns during the marriage for which taxes are still owed, that liability is owed by both parties to the taxing authorities. Courts have the power in a divorce proceeding to assign that debt to one party by order or agreement, but that does not necessarily satisfy the taxing authorities.
Unless you file an innocent spouse application with the IRS (and the IRS makes an innocent spouse determination in your favor), they will still consider a joint debt to be owed by both you and your former spouse. A court order allows you to collect against your former spouse but does not prevent the IRS from collecting from you.
If you are employed, you may need to change your withholding on Form W-4. If your withholding has been based on a married filing jointly status, change the status to either single or head of household. Also review your deductions and additional income as they impact your taxable income.
If you are receiving spousal support or other taxable payments pursuant to a divorce, you may need to make estimated tax payments. If your withholding will not be enough to cover your taxes for the coming year, set up quarterly estimated tax payments so that you will not owe taxes and penalties at the end of the year.
If you changed your name, for example, you restored your maiden name; you need to change your name on your Social Security card. To accomplish this, you must show a recently issued document as proof of your legal name change. The Judgment of Divorce or other court order will satisfy this requirement. In addition to showing a legal document proving your divorce or annulment, you must provide an identity document that shows your old name, as well as other identifying information or a recent photograph.
If you divorce in the middle of a tax year, your judgment or settlement agreement should clearly define how income earned and expenses paid during the marriage are to be reported to avoid filing inconsistent returns. In the absence of an explicit agreement, it is advisable to consult with your former spouse when preparing your return to avoid IRS issues related to both your return and that of your former spouse.
For additional insight related to this article, please see Divorce and the Tax Effect: FAQs for 2019 and Beyond.