ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, March 25, 1996 TAG: 9603270002
SECTION: MONEY PAGE: 6 EDITION: METRO
DATELINE: WASHINGTON
SERIES: Changes in the Tax Law
SOURCE: DAVE SKIDMORE ASSOCIATED PRESS WRITER
Life's messy enough for people going through divorce without the tax complications it can bring.
But, at the very time most people have their minds on other things, they must spend time and energy figuring out arcane tax rules. And, at the very time two spouses may not even be speaking civilly, they may need to cooperate to minimize their tax bills.
Divorced and separated people at least should review the rules in IRS Publication 504 before making such decisions as the timing of their divorce, custody and support arrangements and - for women - whether to resume using their maiden name.
For instance, alimony is deductible for the payer and taxable for the recipient. Child support isn't deductible and it isn't taxable. So, it's better to pay alimony and better to receive child support.
Also, women who want to resume using their maiden name should get a new Social Security card. They should use their married name on tax documents until then.
Another consideration is filing status. A married couple usually pays more tax than they would if each spouse were single. So, if you have a choice of whether to get divorced in December or January, you may want to choose December. That's because if you were divorced or legally separated under a court-approved decree of separate maintenance on the last day of the year, you're considered unmarried for the whole year.
There's a narrow exception. You can't divorce in one year and remarry the same person in the next simply to lower your tax bill. The IRS will consider you to be married the entire year.
As a divorced or legally separated person, your filing status will be either single or - if you qualify - head of household. Head-of-household status is for people providing a home for children or another qualifying person. It has a lower tax rate and a higher standard deduction.
If you're planning a divorce but still living together, or living apart without a court-approved decree of separate maintenance, then you're married for tax purposes. Almost-divorced isn't good enough for the IRS.
Your filing status choices generally are married or married filing separately. However, you may be able to claim head-of-household status if you lived apart from your spouse for the past six months of the year.
Married-joint status generally, but not always, is preferable to married-filing-separately status, which limits many tax breaks. You may want to figure your tax both ways. In a few cases - if one spouse has high medical bills, for instance - it may make sense to file separately.
But, the danger with married status is that each person who signs the return is responsible for the entire tax liability. If there's a problem later, and you're audited, the IRS can come after you for back taxes your spouse should have paid. With married filing separately, you're responsible only for your own tax.
In a rule new this year, the IRS at least promises to keep each spouse informed of its efforts to collect jointly owed taxes from the other spouse.
If you and your spouse use the married-filing-separately status, you can change your mind later and file jointly using an amended return, Form 1040X. But it doesn't work in reverse. If you file jointly, you can't change your mind later and file separately.
To qualify for head-of-household status, whether married or unmarried, you must pay more than half the cost of keeping up a home for yourself and your unmarried child (or other qualifying person who usually must be your dependent). The child or other person must live with you for more than half the year, unless the person is your parent. There's another rule for divorces before 1985.
A child can qualify only one parent for head-of-household status. The parent with custody gets to claim the status. In cases of joint custody, the parent who has custody for the greater part of the year - even if for only one day longer than the other parent - is considered the custodial parent for tax purposes.
If each divorced spouse is the custodial parent of a child, then both can claim head-of-household status.
The principle is the same for other tax benefits aimed at households with children: the dependent exemption, the earned income tax credit, the child and dependent-care credit. Only the custodial parent gets to claim the benefit - regardless of which parent provides the most support.
There's an exception for the exemption, which is $2,500 for 1995. The custodial parent can permit the noncustodial parent to claim the exemption for one or more years by signing Form 8332.
To ensure receipt of support payments, some custodial parents sign a Form 8332 good for only one year at a time.
However, there's a way around that if you're the noncustodial parent who has been given the right to claim the exemption and your spouse refuses to sign the form. In place of Form 8332, you can attach a copy of the cover page of your divorce decree or separation agreement (with the other parent's Social Security number), plus the page that unconditionally states you can claim the exemption, plus the page with the other parent's signature showing the date of the agreement.
Divorce can also complicate the taxation of home sales. Generally, people who are 55 or older are entitled to a $125,000 exclusion for capital gains on the sale of their home.
But it's one to a customer. In a second marriage, if one of the spouses used the exclusion previously, then the other spouse can't take the exclusion.
So if you're divorced, intend to sell your home, haven't used your exclusion yet and intend to marry someone who's already used their exclusion, you probably will want to sell your home before the marriage. If each remarrying spouse has a house to sell, and both are eligible for exclusions, both homes should be sold before the marriage. After the marriage, only one of the homes will be eligible for exclusion.
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