My wife and I are trying to decide whether to divorce, or just live separately and keep working on the relationship. My question has to do with taxes. If we don't divorce, since we maintain two separate households, we would probably end up with "married filing separately" status, whereas if we go ahead with the divorce, which can be finalized about 3 weeks from now, we would file with "single" status. My question: which status would hit us worse in taxes? I've heard stories that the MFS takes a worse bite than filing as a single, but haven't been able to get solid information one way or the other. Can someone give me a definitive answer?

Thanks!

There is no answer; it depends on each of your finances.
So buy some tax software and figure it both ways.
Most couples do pay more as MFS.

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Originally Posted by joypulv

There is no answer; it depends on each of your finances.
So buy some tax software and figure it both ways.
Most couples do pay more as MFS.

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As it stands right now, I have no income. We've agreed on a maintenance amount and that's what I get. She makes about $6K a month and gives me $2400 of it. It's not officially alimony, but assuming we go ahead with the divorce it will be. What I need to know is, does MFS pay more or have a worse percentage, bracket or whatever it's called, than single?

Single/MFS are about the same then.
You do have an income; 28,800. Minus 3,650 exemption, tax is 3,358 either way (2010).
She's more likely to have deductions (mortgage? def. alimony). If her taxable income is 40K at most, her tax is around 6K either way.
When filing jointly, tax on 64K (2 exemptions) is around 8,700.
If it's worth $600, finalize the divorce.
(Another question: how many years of alimony will you get? That matters.)

(Keep in mind she can't deduct alimony, and you don't have an income, if you aren't divorced. Also keep in mind that you can still file a joint return if still married, even if living apart, and it behooves you to.)

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Originally Posted by joypulv

(Keep in mind she can't deduct alimony, and you don't have an income, if you aren't divorced. Also keep in mind that you can still file a joint return if still married, even if living apart, and it behooves you to.)

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!! That's interesting, because she's under the impression that she can deduct whatever she gives me whether we're divorced or not. Definitely something to consider.

To answer your other question, our settlement agreement right now gives me 2 years of alimony. After that, the court evaluates our situations and decides whether to continue it or not.

Thanks!

Alimony has it's own line on the 1040. I wonder what she plans to deduct it as? Nothing, as far as I can see.
BUT you don't have to pay taxes on the money she gives you either, so it could be a wash.

Alimony for less than 3 years is subject to something called the recapture rule, which you need to look into sometime before you are re-evaluated. It affects both parties.

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Originally Posted by joypulv

Alimony has it's own line on the 1040. I wonder what she plans to deduct it as? Nothing, as far as I can see.
BUT you don't have to pay taxes on the money she gives you either, so it could be a wash.

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I believe she was told that she could deduct it as some kind of maintenance even without the decree, but it may have been as a gift or something like that. I don't know for sure.

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Alimony for less than 3 years is subject to something called the recapture rule, which you need to look into sometime before you are re-evaluated. It affects both parties.

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I'll track it down. Thanks!

I tried to take a look at that recapture rule, but the vocabulary is so far beyond me it gave me a headache. Can someone give me the English version??

Incidentally, for tax purposes I have two other dependents. I don't know if that makes much difference or not.

I was wrong - her payments do count as alimony when divorce is interlocutory or pendente lite. So you do pay tax on alimony and she deducts it, and it's more expensive for both of you over filing jointly. You can put off the divorce and save.
(Gifts to spouses or exes are not tax deductible.)
Recapture: basically you want 3 years of alimony, or not too much reduction. I'm too tired to figure it out too.
Dependents: just means more exemptions (for only one person, of course). If it's unclear who gets to claim them, that can be complicated too.

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Originally Posted by joypulv

I was wrong - her payments do count as alimony when divorce is interlocutory or pendente lite. So you do pay tax on alimony and she deducts it, and it's more expensive for both of you over filing jointly. You can put off the divorce and save.
(Gifts to spouses or exes are not tax deductible.)

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I'm not sure what "interlocutory" or "pendente lite" (less calories?? ) mean, but we've agreed to go ahead with the divorce for other reasons.

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Recapture: basically you want 3 years of alimony, or not too much reduction. I'm too tired to figure it out too.

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I gathered that, I just don't get why or what exactly it is that they do if it's less than that. The info on the IRS pages sounded like pidgin Klingon to me.

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Dependents: just means more exemptions (for only one person, of course). If it's unclear who gets to claim them, that can be complicated too.

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That much I do know: I claim them because they live with me and she doesn't want anything to do with it. They're both over 18 so she thinks they should be completely out of her hair in any case. It's one of the many things that broke us up. So they're on my taxes, pure and simple.

Good, so as long as they are qualifying relatives (if they are no longer qualifying children) you get 2 more nice big exemptions. If they are children (full time students under 24) and you have even a little earned income, you could get the Earned Income Credit, which will be more than the amount of tax withheld.

Sorry I still don't feel like interpreting the recapture rule either. Divorce isn't one of my favorite topics. I was hoping someone would know offhand.

It means 'Litigation pending' and has to be court ordered but should be easy to get, given that you have already moved.

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Originally Posted by joypulv

Good, so as long as they are qualifying relatives (if they are no longer qualifying children) you get 2 more nice big exemptions. If they are children (full time students under 24) and you have even a little earned income, you could get the Earned Income Credit, which will be more than the amount of tax withheld.

Sorry I still don't feel like interpreting the recapture rule either. Divorce isn't one of my favorite topics. I was hoping someone would know offhand.

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No problem. My brother does taxes, but he wasn't answering my emails. I managed to get a comprehensible answer out of him after about a week :rolleyes: So I have a decent handle on it now. Thanks!