Originally published on Forbes.com.
I think that it is intuitively obvious that divorce is a major source of stress. I do not need to supplement the assertion with further research. Go ahead and google “divorce stress” and pick from the numerous articles I could have cited to lead. Dammit Jim, I’m a tax blogger, not a therapist.
Nonetheless, I have just a couple of tips that can greatly reduce post marital stress. They fly in the face of conventional wisdom, but they are based on extensive reading of Tax Court decisions. The recommendations are that you not file a joint return for the final year of the marriage and that non-custodial parents not expect to be able to claim dependency deductions.
The recommendations fly in the face of conventional wisdom because planners assume that people are rational and want to minimize their aggregate tax liability and will then equitably share the savings. Only in rare circumstances will separate filing produce a lower tax liability. The dependency deduction may be more valuable to a non-custodial parent.
So if you are having one of those friendly divorces, my advice might not be applicable to you. Of course, there is a term for a couple that can navigate all the complexities of a divorce without the least bit of anger and recrimination and irrationality. The term is “still married”. Since both my recommendations are unconventional, they both merit a bit of discussion. I’ll tackle the dependency deduction first.
Form 8332 Don’t Leave A Broken Home Without One
The amount of attention devoted to dependency deductions relative to the dollars at stake makes me think that there is something more than finance at work. I suspect that people are somehow feeling that the dependency deduction validates them as parents. The high level of emotion relative to the dollars at stake motivated Congress, wisely, to keep the IRS out of the argument.
The dependency deduction goes to the custodial parent unless the custodial parent releases it. The IRS has created Form 8332 for that purpose. It has to be signed by the custodial parent and attached to the non-custodial parent’s return (The Tax Court has sometimes accepted documents as being equivalent to Form 8332, but that is a very iffy approach).
Divorce attorneys, perhaps in the hope of keeping things simple, seem to lean towards splitting multiple children among the two parents and calling for the deduction to alternate year by year when there is only one child. The latter course is indicative that there is no actual tax planning going on. Regardless, you end up with an agreement, blessed by a probate court judge that indicates that the dependency deduction goes to the non-custodial parent for some of the kids in some of the years.
The agreement and the order of the probate cut no ice in Tax Court. If the custodial parent is recalcitrant and does not provide the non-custodial parent with Form 8332, the non-custodial parent is probably out of luck. David Katz was recently in Tax Court reenacting the story that has played out there many times.
Petitioner and Ms.Pursell’s divorce decree was entered by the Third Judicial District Court In and For Salt Lake City, State of Utah. Therein, petitioner and Ms.Pursell were awarded joint legal custody of S.K. and M.K., and Ms.Pursell was awarded primary physical custody. In that regard the divorce decree went on to expressly state that the children should reside with Ms.Pursell.
The divorce decree also specified that petitioner and Ms.Pursell were each “entitled to claim one child for tax dependency exemption purposes” on their respective tax returns.
Mr. Katz was in Tax Court over a deficiency of $2,779 that was generated because he did not have Form 8332 attached to his 2009 return. He finally got his ex to come around and attempted a dramatic last-second Hail Mary pass.
On September 23, 2013, the day of trial, petitioners provided respondent with a Form 8332 signed by Ms. Pursell releasing her dependency exemption deduction claim for M.K. for 2009. The Form 8332 was dated September 22, 2013. Petitioners ask us to accept this Form 8332 and allow petitioners to claim a dependency exemption deduction for M.K. for 2009.
The Tax Court did not award him a touchdown.
Ms. Pursell claimed S.K. and M.K. as dependents on her timely filed 2009 Federal income tax return. The Commissioner did not examine her return or disallow the dependency exemption deductions.
Under the circumstances of the instant case, a holding in petitioners’ favor would contravene the intent of the statute by allowing both parents to claim a dependency exemption deduction for M.K.
Rarely a month goes by without a decision like this issuing from the Tax Court. Published Tax Court decisions being the tip of the iceberg, there must be countless disallowances. It is just too easy for the non-custodial parent to not follow through on the obligation to provide the Form 8332.
My recommendation is that if you can get any sort of real concession for passing on the dependency exemption, you should take the concession. Further, if you and your ex are reasonably secure financially and will both likely end up leaving money to the same kids, be magnanimous. What is it that you are really fighting about?
The Joint Return For The Last Year Of Marriage
This is a tougher issue since divorce lawyers seem to assume that you are obligated to cooperate in filing a joint return and probate judges often back them up. The Nebraska Supreme Court has told probate judges they cannot order people to file joint returns. That is a start. Still, it might be an uphill battle.
I have written extensively on the downside (i.e. joint and several liability) of joint returns for the less financially sophisticated half of the couple, who is often presented with a pen and a sign here sticker in a due date fire drill. It may seem self-absorbed to quote myself but I will do it anyway from my piece title Do Not Be Pressured Into Blindly Signing A Joint Return
If you have any doubt about the accuracy of the return, don’t sign it until you have satisfied yourself about possible discrepancies. If you have any reason to think that your spouse has unreported income, do not sign. If you are not confident that the total balance due is being paid, do not sign until you are satisfied as to how it is being covered. There is relief from joint and several liability under the theory of “innocent spouse”, but an attribute of an “innocent spouse” is not being aware that there is a problem with the return.
That advice is for people who are staying married. Trying to cover all those bases communicating through lawyers does not seem that practical. The movie Blue Jasmine might be a better warning on the perils of filing jointly with a financially sketchy spouse.
Of course, Jasmine’s failure to follow her friend’s advice with regard to joint filing was not her only mistake.
There is, however, a strong argument for the more financially sophisticated half of the couple to not ask for a joint return, even though it costs extra taxes . There is this story my friend James told me. Stories from my friend James are not necessarily true in detail. They are more in the nature of parables, meant to reveal a higher truth.
James had a career a lot like mine, only somewhat more chaotic as he has this tendency to speak his whole mind in circumstances where I might have reasoned that discretion was the better part of valor. Here is our discussion about how the savings from getting your ex to join in filing a return for the last year of marriage can quickly evaporate.
James: Remember that partnership I got kicked out of because I couldn’t get along with the managing partner.
Me: Which one? The one where you thought the managing partner was acting like Hitler or the one where you thought he was acting like Stalin. Then there was the woman managing partner that you compared to Catherine the Great. You know mentioning the horse thing was a big mistake.
James: No. It was Vlad the Impaler. I told him he could …..
Me: Contributor guidelines James.
James: Yeah right. Anyway, the final K-1 from that partnership was the same year I got divorced. Sally was represented by Louie the Louse, so I had to pay her an extra four grand to get her to sign the joint return. It saved me about six thousand as opposed to filing separately. So I figured it was a pretty good deal.
Me: And then?
James: The partnership got audited and caught the agent from hell. It turned out that Vlad had held up deposits for the last two weeks in December and AFH figured it out.
Me: A managing partner of a CPA firm with a pile of checks in his desk drawer at the end of December. Shocking, shocking.
James: Yeah I know. Next thing you know we will find out that there was gambling at Rick’s.
James: So I end up with an audit adjustment of $10,000. Of course, Vlad is not going to give me any cash and Sally is not going to kick in anything towards the extra tax, so I’m out another four grand. Only it gets worse.
Me: Sally, no doubt, showed all the notices that she got copied on to Louie the Louse, who explained to her that you and Vlad the Impaler must have been in cahoots to understate your income.
James: You’ve got it. Alimony went up by $100 bucks a week.
James’s story may be a bit embellished, but the moral is clear. When you are divorced you want to stay out of one another’s business to the greatest extent possible. That final joint return can turn out to be a painful continuing connection.
You may have this vision, that you and your ex are going to become pals after the wounds have healed. It can happen. I know of couples who vacation with their exes and their exes’s partners. You might consider this. Filing a joint return is an irrevocable election while filing separately is not. File separately to get through the contentious phase, wait a couple of years and amend to a joint return. You can use the refund to help pay for that cruise the four of you are going to take together. Or not.
You can follow me on twitter @peterreillycpa.