No matter if you’re single, married, or divorced, filing your taxes is often confusing. Just figuring out where to start can be overwhelming. Do I file them on my own with a program like TurboTax? Do I hire an accountant (CPA) to help me file my taxes? Since taxes are due in less than a month we figured it would be a great time to have Michele Spence, who is a partner and CPA at Marcum LLP, on the podcast to give us the do’s and don’ts of filing your taxes. We asked her a series of questions we think will help guide anyone and everyone toward the right decision about how to file their taxes.
Q: What would be some of the pros or cons versus working with a professional accountant that can actually do this work for you and it will cost you, versus trying to figure it out yourself?
A: Software like TurboTax is perfectly fine if you have a couple of W-2s and some itemized deductions, a very simple, straightforward tax return, not a lot of complexity. You want to use someone like me or a CPA because your situation is such that you may need estimated tax payments, you may have a small business, you make get K-1s, or you may have brokerage statements that you don’t know how to enter or handle. It’s just better sometimes to leave it to the experts. And yes, it does cost money, but in the long run, you’ll save money.
It’s important to point out that the divorce process can add a fair amount of complexity to doing your taxes. Michele explained to us that if your spouse was the one paying the taxes, that is something that will have to be discussed during the divorce process, so you’ll know what to expect come tax season.
Q: When you’re talking about how your spouse may have been paying your taxes through their withholding, does that mean, for example, my spouse worked for this law firm and the taxes were already being withdrawn and deducted from his paycheck? We didn’t even see any of that, but now all of a sudden, I’m going to be responsible for part of those taxes that just automatically were taken out of their paycheck?
A: Exactly. That’s exactly right. As you’re in the process of the divorce, you want to make sure that you know what’s going to be in your bucket at the end of the day. For example, if you don’t work, if you’re the spouse that didn’t work, now you’ve probably got some investment income, because typically things are split that way. You’ll get half of the mutual funds, he’ll get half, and you’ll have income generated from those. If you have these items, you have to consider them when you pay taxes. Your way of paying is going to be through quarterly estimated tax payments, because you don’t have a job. If you did have a job, you could adjust your withholding to cover the investment income.
Q: Or if you’re self-employed, it is estimated quarterly payments as well?
A: Yes, that’s right. If you’re self employed, you’re used to paying those estimates. You would just continue, beginning with the first quarter that the tax is typically due April, June, September and January.
Q: So state taxes obviously vary depending on your state. Federal taxes vary based on your income level?
Q: Is it possible to know what the brief federal income levels are in terms of what those percentages of taxes are?
A: Yeah, without getting too technical, it all depends on your filing status. If you’re filing single, which means you’re not married (as of the end of the year, you are not married) you can file single. If you have a dependent child living with you, in which you pay more than half the cost of the home, you can file as head of household. Single versus head of household have different tax rates and different tax brackets. Single is typically the highest, head of household is better, and married filing jointly is even better. But again, if you’re divorced, you can’t file jointly, alright?
Q: If you are married but getting divorced, but it hasn’t been signed off yet, you can file married but separate?
A: You can file separately if you’re not divorced – married filing separately. But that typically results in more taxes due. What we tell people is this. When we’re going through this calculation, we tell them let us do the return based on joint, and then let us split it. Let’s see what the tax differential is. If it’s substantial to the other spouse, we make them pay. We make them give the other spouse some compensation for allowing the joint filing.
Q: What if you’re not making any money?
A: So if you’re not making any money, there are thresholds that require you to file a return if you have certain investment income. You may still have to file, but you may not owe any tax. There is a 0% tax rate. There is. Some people that are very wealthy that only have dividend income or capital gain income may not have any tax due.
Q: Okay, so then the next question, how do I pay my taxes?
A: If you’re not working in a job where you’re getting a W-2, and they’re withholding taxes, then you have to make those quarterly estimates we talked about. Usually, the accountant will calculate those so that you avoid any underpayment penalties. The IRS wants their money evenly throughout the year. The states follow suit with that.
Bonus Tip from Jessica: When I had to begin paying my taxes quarterly I opened up what I call a tax escrow account. Every month, when I get paid, I automatically put what would go towards my taxes into that account. That way, at the end of the quarter, the money I owe is already set aside and ready to be used.
Q: So let’s get into alimony. Is alimony taxable income? You’ve already answered that, but let’s talk a little bit more about it.
A: The rules have changed, T.H., so let me explain. Before January 1st 2019, if your divorce agreement stated that the spouse would pay alimony, and it was defined properly as alimony, then the recipient claimed the income and the payor got a tax deduction for it, okay? But then, January 1st 2019, any divorce decree that was entered into after January 1st 2019 no longer allowed a deduction for alimony nor was it taxable income. Anything before that date stands as is. It’s still taxable, still deductible. But now, for any newer divorces, no deduction and no taxability, so it’s great for the receiving spouse.
Q: Okay, when people talk about their filing status, what is that? What’s my filing status?
A: Again, it depends on whether you’re married, unmarried, or have a dependent child or not. It could either be single, where you’re unmarried and no dependent children. It could be head of household, you could be married and file head of household if your spouse doesn’t live in your home for the last six months of the year while you’re going through your divorce. But you have to maintain a home for a dependent child and pay more than half the costs of keeping up the home. That’s where it gets technical. That’s where you need to seek the advice of a CPA to help you determine what your filing status is. Also, you have to find out who can claim the kids. Now, the dependency exemption went away with the Tax Cuts and Jobs Act, but you still have to report on your tax return if you’re claiming a dependent, because of other credits that may be available, like child tax credit, or the child care credit, or the educational credits. It is important to button that down in your divorce agreement as to who is claiming which kid, and when. Because the custodial parent, that is the person who has the children the most, gets a lot of those benefits and doesn’t have to relinquish them to the other spouse unless they sign off on a certain Form 8332.
Q: What if you do 50/50 custody, literally 50/50?
A: So if it’s 50/50, typically, the person making the most money will be the one to be able to claim the kid, unfortunately. It depends on who makes the most.
Q: What if you’re living with someone (we can just use me) I’m divorced many years, I’m living with someone, we do have a cohabitation agreement that shows that we own our home 50/50, and then have I just complicated everything? What’s my filing status?
A: You would still file as single.
Q: Also, do you get a mortgage deduction?
A: Exactly. If you weren’t married, and you had a mortgage together, and you paid for that mortgage 50/50, you would be able to deduct half on your return and on half on his return. However, when the tax law changed in 2018 or ‘17, with the Tax Cuts and Jobs Act, they increased the standard deduction for single people, married people, and head of household, and they reduced the state income tax and the real estate tax deduction.
Q: Then our last question is, can I deduct the cost of getting divorced?
A: Unfortunately you are not able to deduct the cost anymore.
Bonus tip from Michele: I just want to close with one thing. I appreciate you having me on today. I highly recommend that you work with a team such as your CPA, your financial planner, and an attorney. You have to get your estate in order. You have to get wills in order. You have to get your taxes in order and your finances, because you’re going to have to live on a budget. That’s critical. So get your team of trusted people in place, okay? That’s my last tip.