Lower Rates For Some Marrieds Filing Separately
By Julian Block
Married couples need no reminder that they usually benefit from joint filing when one mate earns all or considerably more of the income than the other, as explained in the previous section on “Marriage or Divorce as a Tax Shelter.” That tax break, though, can become a trap for spouses who decide to split, but do not obtain a divorce or a legal separation.
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.
Among other drawbacks for joint filers, they are jointly and severally liable. So if the IRS audits a joint return and demands some extra taxes, it can dun either mate for the entire amount of any additional taxes, penalties and interest that become due.
It makes no difference that they have since separated, one spouse has died or that the extra taxes are attributable to the business or income of only one of them. There is, however, relief from joint liability for someone who qualifies under the innocent spouse rules.
CAUTION. Whatever your reasons for avoiding tax togetherness, the two of you may be in for an unpleasant and expensive surprise when filing time rolls around. The taxes you will pay as married persons filing separately can be considerably more than the taxes you would owe as joint filers or even as two unmarried persons.
There are other disadvantages for a married couple who chooses to file separately. For instance, each of them must itemize their deductions for contributions and the like or they must both use the standard deduction that people automatically get without having to itemize. In effect, the mate who itemizes forces the other one to follow suit.
Moreover, filing separately when the spouses are not living apart eliminates or reduces certain tax breaks -- for instance, the credit for child- or dependent-care expenses and the extent to which Social Security benefits are taxed.
Special rule for married persons living apart. Fortunately, there is a way out of this trap for many married persons. An often-overlooked break entitles you to be treated as if you were unmarried for the year in question, say, 2002, provided you satisfy certain requirements. Result: Even though you are not divorced or legally separated, you are excused from having to use the rates for a married filing separately and get 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.
(1) You file a separate return from your spouse.
(2) Your spouse did not live with you at anytime during the last six months of 2002.
(3) You paid over 50 percent of the cost of keeping up your home for 2002.
(4) Your home was, for more than half of 2002, the principal residence of your child, stepchild or adopted child, whom you can claim as a dependent.
TIP. You are not necessarily disqualified from filing as a head of household just because you are unable to claim the child. As the parent with custody (the mother, in most cases), you continue to be eligible, if either one of these two exceptions apply: (1) You sign IRS Form 8332, allowing the 2002 exemption to be claimed by your husband, the parent without custody, or (2) A pre-1985 agreement grants custody to you and the exemption to your husband and he provided at least $600 in 2002 for the support of the child.
TIP. When you and your spouse live apart by mutual agreement, you might be able to work out an arrangement whereby each gets a dependent child and each qualifies as a head of household. Congress enacted the special provision that treats marrieds as unmarrieds 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 and without any actual abandonment.
Another break is that the standard deduction is higher for a head of household ($6,900 for tax year 2002, up from $6,650 for 2001) than for a person with the filing status of single ($4,700 for 2002, up from $4,550 for 2001).
Mate must move out for you to qualify as head of household. The Tax Court ruled that a husband failed to qualify when he and his wife agreed to live in separate areas of the same residence. Living apart under one roof does not 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 in issue, Laurel and her husband, William, had ceased to live together; but during the balance of the year, she sometimes let him 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 her 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.
CAUTION. To avoid getting caught in an audit trap like Laurel, do not chat yourself into loss of a tax break. Confine your answers to the questions raised.
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