Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

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alpaca1
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Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by alpaca1 » Sat Feb 24, 2018 10:44 pm

I have a question for those BH'ers who perhaps would have experienced the same thing or have better knowledge on this (tax) subject.

My wife and I have been separated for about 2 months now, and although we aren't in a bitter fight or anything I was hoping I could just file my taxes separately so I didn't have to see her. However, what got me worried was that it looks like even if we file MFS, if one of us decides to itemize, then both of us have to itemize. If one of us decides to take the standard deduction then BOTH of us need to take the standard deduction.

Here's some information:

Age: 32
W2 Income from two jobs: 135k
401k: 18k Contributed
HSA: 3400 Contributed
2 Mortgages with a bunch of interest paid (Only on my name, not hers)
State: VA (Non Community Property State)

I asked, and luckily she said she still has not filed yet.

Should I go ahead and file and itemize before she can get hers in? I don't know what I should do in this situation.

It feels a little .. dishonest to go ahead and file and itemize without asking her to be honest.

She also has a mortgage, but that is joint with her mother. i suspect that her mother will take the deduction for the mortgage interest and she will just do the standard deduction.

She makes about 55k a year, contributes a little money to a roth/defined contributed pension plan, and had health insurance all year through her employer. It's pretty generic I suppose what her outlay looks like.

Please help, Turbotax says that if I file just the standard deduction I will OWE 10k! However, doing MFS I will "only" owe 1.8k federal with itemized...
Last edited by alpaca1 on Mon Feb 26, 2018 8:32 am, edited 1 time in total.

straws46
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by straws46 » Sat Feb 24, 2018 11:06 pm

Almost always better to file jointly and divide the liability/refund any way you both can agree on.

Katietsu
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by Katietsu » Sat Feb 24, 2018 11:11 pm

The decision on itemizing is not made by whomever files first. If one person files using itemized deductions, then the IRS will disallow a standard deduction from the spouse. The spouse who files with the standard deduction, will get a letter from the IRS, months from now, reducing the deduction to zero and asking for money.

In my opinion, you have an ethical obligation to inform your spouse that you will be itemizing. This will allow them to make the best tax decisions for themselves, upfront, within the limits of the law.

An alternative is to consider filing jointly. The only reason to pursue this option is if there is a collective lowering of the tax liability by doing so. This can be done using a tax preparer as an intermediate with the two of you not even seeing each other except to cash the check. The tax preparer can make it clear that if either of you attempts to cash the check alone, the other could make their life very unpleasant.
Last edited by Katietsu on Sat Feb 24, 2018 11:35 pm, edited 1 time in total.

alpaca1
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by alpaca1 » Sat Feb 24, 2018 11:13 pm

Yes that makes sense thank you, that's why I mentioned it feels dishonest to just do it but I guess they have already thought of that scenario because it would've been done a million times over already.

So, technically could I itemize and take the deduction for my two homes (On my name, acquired before marriage) and she could as well for her property (Owned joint by her and her mother and acquired before marriage)? I wonder if it's a dollar amount limit of the deduction, or if it's a "You did it, so your spouse is ineligible" deal?

i have about 20k in home loan interest. I suspect she has about 10k.

Katietsu
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by Katietsu » Sat Feb 24, 2018 11:33 pm

The mortgage interest deduction limits for married filing separate are one half the limit for a joint return. In other words, instead of being able to use the interest paid on a $1,000,000 mortgage and $100,000 home equity loan, a person using the married filing separately status is limit to interest associated with $500,000 of mortgage debt and $50,000 of home equity debt. It does not matter what the spouse does.

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segfault
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by segfault » Sun Feb 25, 2018 12:01 am

I know you said you're not in a bitter fight, but this is a financial matter that needs to be negotiated between the two of you. Talk to your attorney(s).

alpaca1
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by alpaca1 » Sun Feb 25, 2018 12:06 am

Thank you. I will talk to her and tell her that I will be itemizing so she isn't blind sided.

THY4373
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by THY4373 » Sun Feb 25, 2018 10:18 am

First off my advice is to be honest and upfront in this. You will only pay for it one way or another in the future if you don't. Also don't let emotions get in the way of cold hard financial reality. If it is better for you tax wise to file jointly I would.

One other bit of advice, my wife and I went through a collaborative divorce (which I highly recommend if possible) one member of the team was a neutral financial adviser who dealt with all the financial aspects of the divorce. Without a doubt this was the best money my ex and I spent in the divorce. This person did all the financial calculations and both lawyers accepted her analysis. She was half the price of the lawyers and it saved my wife and I both paying our lawyers (twice) to do essentially the same thing. Money well spent.

Oh and since I am further along in the process than you (divorce was finalized late last year) it is awesome once you are done. Love having my life and freedom back. Being able to reset one's life, mid-life is actually a lot of fun and a growing experience.

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Kenkat
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by Kenkat » Sun Feb 25, 2018 10:23 am

I would take Katietsu’s advice and use a tax preparer to file your taxes jointly until the divorce is finalized. Only if it is to both of your benefit would I file separately. A preparer could tell you that. If you just inform her that you are filing separately and too bad about your tax bill, you are going to create an adversarial relationship and may end up paying far more when the divorce decree is finalized.

Put yourself in her shoes - what if she declared she was filing separately and you are stuck with a $10k tax bill? Don’t light the village on fire while you are still trying to move out of it.

deskjockey
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by deskjockey » Sun Feb 25, 2018 10:32 am

alpaca1 wrote:
Sat Feb 24, 2018 11:13 pm
So, technically could I itemize and take the deduction for my two homes (On my name, acquired before marriage) and she could as well for her property (Owned joint by her and her mother and acquired before marriage)? I wonder if it's a dollar amount limit of the deduction, or if it's a "You did it, so your spouse is ineligible" deal?

i have about 20k in home loan interest. I suspect she has about 10k.
Just a word of caution here--was either of your two "homes" your primary residence in 2017? Did you rent either of them out? Something doesn't seem right about this (but, then again, we don't really know much about your situation). Just make sure you're actually entitled to take the home interest deduction for both of those homes.

As for your question, I would encourage you to follow the advice of a couple of folks here who said that you should hire a neutral third party to file your taxes jointly. It will probably save you and your wife money AND further bitterness.

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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by LarryAllen » Sun Feb 25, 2018 10:39 am

alpaca1 wrote:
Sun Feb 25, 2018 12:06 am
Thank you. I will talk to her and tell her that I will be itemizing so she isn't blind sided.
I would suggest you talk to her and discuss your options. Generally "telling" people stuff could be taken wrong. Look at the big picture, do the right thing, and remember life is long and karma is real.

skor99
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by skor99 » Sun Feb 25, 2018 10:59 am

One of the core boglehead principles is to have a spouse who is financially compatible. I believe it is the most important step one can take to ensure financial success in life. Now, all marriages have some disagreements, but the best thing to do would be to try your best and then some more to reconcile. Divorce can be a very big setback financially and everything should be done to prevent it IMO.
So my question to the OP would be if they have tried their best to reconcile and get back together. Unless there is violence or abuse involved, I think two educated individuals can come together to admit their mistakes and chart a better path forward.

THY4373
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by THY4373 » Sun Feb 25, 2018 2:08 pm

skor99 wrote:
Sun Feb 25, 2018 10:59 am
Now, all marriages have some disagreements, but the best thing to do would be to try your best and then some more to reconcile. Divorce can be a very big setback financially and everything should be done to prevent it IMO.
So my question to the OP would be if they have tried their best to reconcile and get back together. Unless there is violence or abuse involved, I think two educated individuals can come together to admit their mistakes and chart a better path forward.
Honestly a "good divorce" is better than many marriages. It amuses me sometimes when folks talk about divorce statistics they think if the avoid divorce then it is all good (neatly ignoring the risk of a sub-optimal marriage). My ex-wife and were 100% in agreement on our finances for the duration of our marriage and we did very well. My divorce lawyer commented more than once on how much savings we had relative to our incomes. Both of our lawyers commented on how easy we were to work with because we had no debt (beyond our mortgage) and got along fine. We actually agree on most things, however we are very different in what we want out of a romantic relationship. Post divorce I still consider my ex a friend, help her our whenever I can (she does the same for me) and overall our relationship is much better post divorce. The divorce has also improved my relationship with my son since for the 50% of the time he is with me I am now more able to just be me and I am now mentally freed up from some of the overhead associated with my marriage. And yes my wife and I put in a year in trying to reconcile spending large amount of money on marriage counseling.

This is all a long winded way of saying that divorce can be good and usually it is only as bad as the two parties involved make it. I (half) joke with folks that two of the best decisions I made in life were to marry my wife (it led to my son whom I adore) and divorce her since we were holding each other back.

stan1
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by stan1 » Sun Feb 25, 2018 2:15 pm

The thread is heading off track.

Since you are still married I'd be trying to come to a way to file a joint return. Not meeting or working with her would come at a cost.

Dottie57
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by Dottie57 » Sun Feb 25, 2018 2:23 pm

stan1 wrote:
Sun Feb 25, 2018 2:15 pm
The thread is heading off track.

Since you are still married I'd be trying to come to a way to file a joint return. Not meeting or working with her would come at a cost.
Bite the bullet and file jointly. Pretty sure you will do better financially. You separated close to the end of the year. So MFJ is the most appropriate.

veindoc
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by veindoc » Sun Feb 25, 2018 4:38 pm

Do you need to see each other to file MFJ? You both would likely come out ahead. For what I recall you can opt to split a refund into separate accounts as to avoid seeing each other to cash a check. Also you can send your documents to a tax preparer without coming together to do so. From what I hear divorce is expensive if you can both come out ahead then all the better.

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dodecahedron
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by dodecahedron » Sun Feb 25, 2018 5:59 pm

Preparers have software that can easily compute your taxes with both of you MFS vs MFJ.

Lets say that tax refunds are
  • H for husband MFS
  • W for wife MFS
  • J for the joint return
In general we expect that J > H+W. There are rare cases where this not true, but in those rare cases your preparer should just tell you to go the MFS route.

Otherwise, instruct preparer to file joint return and agree in advance that refund will be split as follows:
  • husband gets H+ (1/2)[J-(H+W)]
  • wife gets W + (1/2)[J-(H+W)]
Refund direct deposit can be split into two accounts using Form 8888, so there is no need for couple to come together to negotiate a check written out to both names.

The same plan works algebraically if any or all of H,W, or J are negative though that case may involve one or both spouses paying rather than a direct deposit split.

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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by jebmke » Sun Feb 25, 2018 6:08 pm

veindoc wrote:
Sun Feb 25, 2018 4:38 pm
Do you need to see each other to file MFJ? You both would likely come out ahead. For what I recall you can opt to split a refund into separate accounts as to avoid seeing each other to cash a check. Also you can send your documents to a tax preparer without coming together to do so. From what I hear divorce is expensive if you can both come out ahead then all the better.
Both need to sign the return (paper file) or the 8879 (e-file). They don't have to sign at the same time. As far as I know, they are jointly responsible for the return though - so if there is an audit or other issue, I believe the are each on the hook for the entire return.

I have had cases where one spouse came in to file MFS only to have the return rejected because the other spouse filed MFJ without her consent or involvement. It did not end well for the spouse that filed MFJ.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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celia
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by celia » Sun Feb 25, 2018 6:37 pm

If you live in a community property state, isn't half your 2017 income considered half hers and half of her income is yours (except for transactions involving separate property)?

alpaca1
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by alpaca1 » Mon Feb 26, 2018 8:25 am

Kenkat wrote:
Sun Feb 25, 2018 10:23 am
I would take Katietsu’s advice and use a tax preparer to file your taxes jointly until the divorce is finalized. Only if it is to both of your benefit would I file separately. A preparer could tell you that. If you just inform her that you are filing separately and too bad about your tax bill, you are going to create an adversarial relationship and may end up paying far more when the divorce decree is finalized.

Put yourself in her shoes - what if she declared she was filing separately and you are stuck with a $10k tax bill? Don’t light the village on fire while you are still trying to move out of it.
Sorry.. Do you mean to say that she will try to claim the mortgage interest as well? She cannot legally.. as her name was never on the two mortgages that I was paying on. She can claim hers though which is a third property that was acquired before our marriage.

alpaca1
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by alpaca1 » Mon Feb 26, 2018 8:27 am

There seems to be a lot of people here suggesting that I file jointly with her. Sad to say, but it's really not a possibility. I did ask, and she said let's just do MFS this year.

alpaca1
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by alpaca1 » Mon Feb 26, 2018 8:28 am

deskjockey wrote:
Sun Feb 25, 2018 10:32 am
alpaca1 wrote:
Sat Feb 24, 2018 11:13 pm
So, technically could I itemize and take the deduction for my two homes (On my name, acquired before marriage) and she could as well for her property (Owned joint by her and her mother and acquired before marriage)? I wonder if it's a dollar amount limit of the deduction, or if it's a "You did it, so your spouse is ineligible" deal?

i have about 20k in home loan interest. I suspect she has about 10k.
Just a word of caution here--was either of your two "homes" your primary residence in 2017? Did you rent either of them out? Something doesn't seem right about this (but, then again, we don't really know much about your situation). Just make sure you're actually entitled to take the home interest deduction for both of those homes.

As for your question, I would encourage you to follow the advice of a couple of folks here who said that you should hire a neutral third party to file your taxes jointly. It will probably save you and your wife money AND further bitterness.
Yes one was a primary residence and we lived in it for the whole year pretty much. My name is on both of the mortgages as well as deeds to the homes and not hers, so she shouldn't be able to deduct any of the mortgage interest.

alpaca1
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by alpaca1 » Mon Feb 26, 2018 8:29 am

celia wrote:
Sun Feb 25, 2018 6:37 pm
If you live in a community property state, isn't half your 2017 income considered half hers and half of her income is yours (except for transactions involving separate property)?
I live in a non community property state.

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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by alpaca1 » Mon Feb 26, 2018 8:31 am

Just wanted to say thanks to everyone for your suggestions. In my opinion this forum isn't the best looking, but I sure do get a lot of helpful information.

I also went back and clarified my original post saying that the mortgage interest was paid by me and that her name is not on the loan(s).

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Kenkat
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by Kenkat » Mon Feb 26, 2018 8:43 am

alpaca1 wrote:
Mon Feb 26, 2018 8:25 am
Kenkat wrote:
Sun Feb 25, 2018 10:23 am
I would take Katietsu’s advice and use a tax preparer to file your taxes jointly until the divorce is finalized. Only if it is to both of your benefit would I file separately. A preparer could tell you that. If you just inform her that you are filing separately and too bad about your tax bill, you are going to create an adversarial relationship and may end up paying far more when the divorce decree is finalized.

Put yourself in her shoes - what if she declared she was filing separately and you are stuck with a $10k tax bill? Don’t light the village on fire while you are still trying to move out of it.
Sorry.. Do you mean to say that she will try to claim the mortgage interest as well? She cannot legally.. as her name was never on the two mortgages that I was paying on. She can claim hers though which is a third property that was acquired before our marriage.
My point was that if you made a unilateral decision to file separately that made her tax bill go up, she was not going to be happy. It sounds as if you have both agreed to file separately so I think you have your answer.

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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by bsteiner » Mon Feb 26, 2018 8:51 am

There are cases in New York and New Jersey where if one spouse wanted to file a joint return and the other spouse refused, the refusing spouse had to compensate the spouse who wanted to file a joint return for his/her additional tax cost (the difference between his/her tax on a separate return and his/her share of the tax on a joint return).

There is also at least one case in New Jersey where the court ordered the refusing spouse to file a joint return, though compensation for the additional tax cost is the more likely remedy.

alpaca1
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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by alpaca1 » Mon Feb 26, 2018 9:35 am

bsteiner wrote:
Mon Feb 26, 2018 8:51 am
There are cases in New York and New Jersey where if one spouse wanted to file a joint return and the other spouse refused, the refusing spouse had to compensate the spouse who wanted to file a joint return for his/her additional tax cost (the difference between his/her tax on a separate return and his/her share of the tax on a joint return).

There is also at least one case in New Jersey where the court ordered the refusing spouse to file a joint return, though compensation for the additional tax cost is the more likely remedy.
That's pretty scary to think about. In my case, she did agree to do them separately. I also notified her that she will need to itemize this year.

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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by bsteiner » Mon Feb 26, 2018 9:49 am

alpaca1 wrote:
Mon Feb 26, 2018 9:35 am
bsteiner wrote:
Mon Feb 26, 2018 8:51 am
There are cases in New York and New Jersey where if one spouse wanted to file a joint return and the other spouse refused, the refusing spouse had to compensate the spouse who wanted to file a joint return for his/her additional tax cost (the difference between his/her tax on a separate return and his/her share of the tax on a joint return).

There is also at least one case in New Jersey where the court ordered the refusing spouse to file a joint return, though compensation for the additional tax cost is the more likely remedy.
That's pretty scary to think about. In my case, she did agree to do them separately. I also notified her that she will need to itemize this year.
It's not scary. If one wants to file a joint return, and the other refuses out of malice, it seems reasonable that the one who refuses should compensate the other one for his/her additional cost. Before that happens, the one who refuses would have an opportunity (in his/her response to the motion) to show that there was some reason other than malice, as well as an opportunity to agree to file a joint return if he/she didn't have a legitimate reason not to file a joint return.

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Re: Help! Soon to be Divorced - Filing taxes Separately and potential huge tax burden

Post by jebmke » Mon Feb 26, 2018 10:54 am

alpaca1 wrote:
Mon Feb 26, 2018 8:31 am
In my opinion this forum isn't the best looking
Was it the ratty-looking bathrobe I was wearing or the fact that my hair wasn't combed? :P
When you discover that you are riding a dead horse, the best strategy is to dismount.

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