Page 68 - Family Law Services

liability. These changes can occur as a result of audits of or amendments to tax returns. It is important
that the couple’s divorce decree address in detail how these liabilities should be divided if they occur.

Hold Harmless Agreement

Divorcing couples should include a hold harmless agreement or similar provision in their divorce decree
regarding debts and creditors. Hold harmless agreements typically identify who is legally responsible to
a creditor. A hold harmless agreement is considered a legal contract between the parties, but in most
cases, does not protect a party from creditors of a joint liability.

Timing of Divorce

Filing Status

For tax purposes, a divorced or divorcing couples’ marital status is determined as of December 31. The
couple’s living arrangements and the stage of their legal process will determine whether a marriage is
considered terminated for tax purposes. A taxpayer in the process of divorcing will be considered mar-
ried for tax purposes unless one of the following conditions are met:

• A final decree of divorce is issued by a family law court.

• A final decree constituting a legal separation under local laws is issued by a family law court.

If the above conditions are not met, the taxpayer is considered married by the IRS and must file either
married filing joint, married filing separate, or head of household. Both parties are required to use the
same filing status if they are still married at the end of the year (see subsequent exception). If filing as
married, there are certain advantages and disadvantages for filing separately versus jointly, and these
should be considered carefully when the time comes to prepare the tax return.

Advantages for filing separately versus jointly are as follows:

• Depending on the circumstances and applicable tax bracket, the tax liability may be less when
filing separately.

• When filing separately, each spouse is solely responsible for the accuracy of his or her own re-
turn and the payment of the tax liability on his or her return.

Disadvantages for filing separately versus jointly are as follows:

• Both parties must either itemize their deductions, or both must choose the standard deduction.

• When filing separately, certain deductions, credits, and education benefits are no longer availa-
ble.

• The net capital loss is reduced to $1,500 per spouse when filing separately.

• The gain exclusion on the sale of a personal residence is limited to $250,000 per spouse when fil-
ing separately.

• The mortgage interest deduction may be limited.

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