One of today’s saddest statistics is that more than 50% of marriages end in divorce. Divorce effects every aspect of the lives of those involved, from housing, standard of living, family matters, and, of course, all things money. We will cover a number of these topics as they relate to taxes. As with any topic relating to income taxes there are always exceptions to the general rule and all situations should be looked at individually.
Conflicts of Interest
The first thing, as a tax professional, you should be concerned about is making sure you have no conflict of interest in filing a return for a separated or divorced client. Many times, these are long time clients and you must decide if you can ethically continue to prepare returns for both of them now that they have split up.
This may not be an issue if there is an amicable situation, however, what is amicable today may not be amicable tomorrow. In the back of your material is a sample Conflict of Interest Waiver. (Cir. 230 § 10.29) Even in the most amicable situation, you should get both parties to sign before starting any work on the return.
If there is any hint of not being able to work with both clients at the outset, you must decide if it would be better for you as a tax professional and them as clients to keep one and pass the other to another professional or pass them both to new professionals. Remember, what is best for the client, while keeping you within ethical standards, is always best.
One of the first items on the tax return effected by separation and/or divorce is the filing status. The basic rule of filing status is you are required to file based on your status as of 12/31 of the tax year. So if you are considered married on 12/31 then you must file Jointly or Separately unless you qualify as unmarried on 12/31.
To qualify as unmarried you must meet all five of the requirements listed:
• Lived apart from your spouse for the last six months of the year
• Must not file a joint return with your spouse
• Must pay for over 50% of the upkeep on their home
• The home must have been the main home of the qualified child for more then 50% of the year
• The qualifying child must be your dependent unless the rules for divorced/separated parents apply.
Each spouse must meet these requirements individually and if they do not then they must file Married Filing Separately. So it is possible that one spouse may qualify to file Head of Household while the other must file Married Filing Separately, a big misconception is that if one spouse is able to file head of Household the other gets to file Single. This is simply not the case. Once the divorce is final each former spouse’s filing status reverts to the unmarried status they qualify for individually.
Tomorrow, Child Custody.