Married couples need no reminder that they can benefit from joint filing when one mate earns all or considerably more of the income than the other. That tax break, though, can become a trap for spouses who decide to split, but don’t obtain a divorce or a legal separation, for example. They still have the option to file jointly, assuming both partners are willing to do so. Nevertheless, one or both might find it more advantageous to file separately. The financial implications are huge.
Among the drawbacks for joint filers: they’re jointly and severally liable. That means married persons remain on the hook even if their marriage breaks up after they file a joint return. So if the IRS audits their return and demands extra taxes, it can dun either mate for the entire amount of any additional taxes, penalties, and interest that becomes due.
Nevertheless, there are some tax drawbacks to filing separately: Whatever a couple’s reasons for avoiding tax togetherness, the two of them may be in for an unpleasant and expensive surprise when filing time rolls around. The taxes they’ll pay as married persons filing separately can be considerably more than the taxes they’d owe as joint filers or even as two unmarried persons.
There are other drawbacks for married persons who choose to file separately. One is that both of them must use Schedule A of Form 1040 to itemize their deductions for charitable donations and the like or that both must use the standard deduction.
Special rules for married persons living apart. Fortunately, there’s a way out of these traps for many married persons. An often overlooked break entitles them to be treated as if they were unmarried for the year in question—provided they fulfill certain requirements. The result: Even though they aren’t divorced or legally separated, they’re excused from having to use the rates for a married individual filing separately and, instead, receive the benefit of the more favorable rates for a head of household.
To take advantage of head of household rates, you have to pass a four-step test.
- Step 1: You file a separate return from your spouse.
- Step 2: Your spouse didn’t live with you at any time during the last six months of 2014. You and your spouse must live in separate residences, warns the IRS, and the courts agree. The Tax Court has ruled that a husband failed to qualify as a head of household when he and his wife agreed to live in separate areas of the same residence. Thus, living apart under one roof doesn’t pass muster.
In another dispute, the court reminded Laurel Hopkins that sharing the same quarters for as little as one day during the last six months of the year can be fatal. Before more than six months had elapsed during the year at issue, Laurel and her husband, William, had ceased to live together; but during the balance of the year, she sometimes let William stay overnight because he was unable to find a dwelling.
As she paid all the household bills and was the sole support of their two children, Laurel, not unreasonably, believed herself entitled to file as a head of household. Unfortunately, in the course of a subsequent IRS audit, Laurel let slip that William sometimes stayed in her apartment. On the basis of that admission, the feds determined that Laurel’s proper filing status was that of a married person filing separately. Though sympathetic to Laurel's predicament, the Tax Court agreed with the IRS that a wife who shelters a homeless husband at any time during the last six months of the year disqualifies herself for head of household status.
To avoid getting caught in an audit trap like Laurel, don’t chat yourself into loss of a tax break. Confine your answers to the questions raised.
- Step 3: You paid more than half of the cost of keeping up your home for 2014.
- Step 4: Your home was, for more than half of 2014, the principal residence of your child, stepchild or adopted child, whom you can claim as a dependent.
You aren’t necessarily disqualified from filing as a head of household just because you’re unable to claim the child. As the parent with custody—the mother, in most cases—you continue to be eligible, if you sign IRS Form 8332, which allows the 2014 exemption to be claimed by your spouse, the parent without custody.
When couples live apart by mutual agreement, they might be able to work out an arrangement whereby each spouse can claim a dependent child and each qualifies as a head of household. Congress enacted this special provision that treats married persons as unmarried individuals primarily for the benefit of abandoned wives (or husbands). But it worded the provision broadly enough to cover couples who have separated and who live apart by mutual agreement—without any actual abandonment.
About the author:
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator) and an attorney. More on this topic is available from “Julian Block’s Year Round Tax Strategies,” available at julianblocktaxexpert.com.
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.