6 minute read
TAXATION
Tax Laws and Legally Separated Clients
By Dawn Thompson, CPA
According to federal and Wisconsin tax laws, legally separated clients can use the single or head of household filing status and cannot use the married filing jointly, married filing separately or qualifying widow(er)/surviving spouse filing status.
Single filing status is available to taxpayers who do not qualify to use the head of household or qualifying widow(er)/surviving spouse filing status and are unmarried or are considered unmarried as of the last day of the tax year. Considered unmarried for this filing status means the client is legally divorced or legally separated under state law.
Head of household filing status is available to taxpayers who are unmarried or considered unmarried as of the last day of the tax year and maintained a household for a qualifying individual. Considered unmarried for this filing status means the client is legally divorced or legally separated under state law or the spouse was not a member of the household for the last six months of the year and the household was the principal residence of a qualifying child.
Married filing jointly filing status is available to taxpayers who are married under state law as of the last day of the tax year, use the same tax year and agree to file jointly. A married couple can file a joint return if they are not living together but are not legally separated or legally divorced under state law as of that date. Taxpayers who are separated under an interlocutory (not final) decree of divorce can also file a joint return.
Married filing separately filing status is available to married taxpayers on an elective basis and is required when spouses have different tax years or do not agree to file jointly.
Qualifying widow(er)/surviving spouse filing status is available to taxpayers who have a dependent child and whose spouse died within the previous two tax years, assuming other requirements are met. One of the other requirements is the taxpayer must have been entitled to file a joint return with the deceased spouse for the year of his or
her death regardless of whether a joint return was actually filed for that year. The Internal Revenue Code and Treasury regulations look to state law to determine whether a taxpayer is married, divorced or legally separated. Some states, such as Texas, recognize only marriage and divorce. In such states, a marital separation is an informal agreement between the spouses, and the state’s laws continue to recognize the couple as married. Other states, including Wisconsin, recognize marriage, divorce and legal separation. The Wisconsin legal system refers to legal separation as a “judgment of legal separation.” Other states refer to legal separation differently; for example, Maryland has “limited divorce,” Oregon has a “separation order,” and other states have “separate maintenance action.” The title used to refer to marital separation under state law is unimportant. The issue is whether the marriage remains intact under state law. There are three types of separation: 1. Trial Separation — In a trial separation, the spouses may live together or separately. They might have a written separation agreement that provides specifics regarding child custody, division of assets and debts, etc., but no paperwork is filed with the court.
2. Permanent Separation — In a permanent separation, the spouses live apart from one another and have no intention of reconciling. Some states require couples to separate for a period of time before a divorce can be finalized. Depending on the state law, the separation date can be quite important. In some states, property, income and debt acquired, received or incurred after the separation date belong to and are the responsibility of the spouse who acquired, received or incurred it. 3. Legal Separation — A legal separation is a formal petition with the court to separate from a spouse under state law. The paperwork is almost identical to paperwork filed in a divorce; both outline division of assets and debts, alimony, child custody and support, etc. However, a legally separated person cannot remarry until a divorce is finalized. In 16 years as a tax professional, I’ve rarely encountered legally separated clients. Within the past six months, two clients have asked about the effects of legal separation. It’s important to consider the implications of the client’s filing status because the wrong filing status can have a significant impact on the client’s tax liability, cost the client tens of thousands of dollars in health insurance subsidies, impact the type of health insurance coverage purchased, hurt the firm’s relationship with the client and cause any number of problems for the client. To determine the best filing status in compliance with the Internal Revenue Code and Treasury regulations, tax preparers first need to know the client’s legal marital status. If a separation is involved, the preparer needs to know if the client’s state recognizes legal separation, the type of separation at play and the status of any court proceedings or judgments. The preparer can then ask about dependents and living arrangements. If a client is married under state law, the married filing jointly or married filing separately filing status can be used. If a client is legally separated under state law, the Internal Revenue Code and Treasury regulations consider them unmarried, and only the single or head of household filing status can be used.
Dawn Thompson, CPA, is the senior accountant at Gillette & Associates (La Crosse). She has worked in public accounting for 14+ years and previously worked as a field auditor for the Wisconsin Department of Revenue. Contact her at dawn@gillettecpas.com.
Resources:
CCH AnswerConnect. (n.d.). 15-305 Wisconsin: Filing status. Retrieved October 15, 2021, from https://answerconnect.cch.com/state/jwi0109013e2c84f5c720/explanations? searchId=824038275&disableHighlight=false CCH AnswerConnect. (n.d.). Explanation : § 2, Filing status. Retrieved October 20, 2021, from https://answerconnect.cch.com/federal/arp1209013e2c83d8fbda/explanations/ arp28313bb6da7b68100093f5001b78be8c780fcCOPY/2-filing-status?single=1&search Id=824080634&disableHighlight=false Heinig, M. J. (2021, September 15). A guide to different types of separation: Trial, permanent, and legal separation. DivorceNet. Retrieved October 21, 2021, from https://www.divorcenet.com/resources/family/types-separation.htm Internal Revenue Service. (2013, February 13). IRS Tax Tip 2013-13 – Determining your correct filing status. Retrieved October 15, 2021, from https://answerconnect.cch.com/ standalone_document/rrx027cf5de367c011000844c90b11c2ac4f10104/irs-tax-tip-201312-determining-your-correct-filing-status?searchId=824065900&disableHighlight=false Internal Revenue Service. (2021, January 26). Publication 501: Dependents, standard deduction, and filing information. https://www.irs.gov/pub/irs-pdf/p501.pdf Internal Revenue Service. (2021, February 16). Publication 504: Divorced or Separated Individuals. https://www.irs.gov/pub/irs-pdf/p504.pdf Internal Revenue Service. (2021, April 6). Interactive tax assistant tool: What is my filing status?. Oracle Web Determinations. Utilized October 20, 2021, from https://www.irs. gov/help/ita/what-is-my-filing-status Otterstrom, K. B. (2018, April 30). Legal separation in Oregon FAQs. DivorceNet. Retrieved December 2, 2021, from https://www.divorcenet.com/resources/legalseparation-in-oregon-faqs.html Otterstrom, K. B. (2021, September 26). Separate maintenance and legal separation. DivorceNet. Retrieved October 21, 2021, from https://www.divorcenet.com/resources/ divorce/separation/separate-maintenance-legal-separation Wisconsin Department of Health Services. (2019, June). Wisconsin county clerk vital records marriage handbook. https://dhs.wisconsin.gov/publications/p01086.pdf Wisconsin Department of Revenue. (2020, December). Publication 109: Tax information for married persons filing separate returns and persons divorced in 2020. https://www.revenue.wi.gov/DOR%20Publications/pb109.pdf Wishnia, J. (2019, November 21). Legal separation laws. LegalMatch. Retrieved December 2, 2021, from https://www.legalmatch.com/law-library/article/maritalseparation-laws.html Wolters Kluwer Editorial Staff. (2020). 2021 U.S. Master Tax Guide (104th Edition, 152, 154, 173, 175, and 176). CCH Incorporated. Wood, R. W. (2011, January 14). Consider tax filing status carefully. Forbes. Retrieved October 20, 2021, from https://www.forbes.com/sites/robertwood/2011/01/14/ consider-tax-filing-status-carefully/?sh=7ddfcb71b10c
