Parting couples in the state of Indiana should take some important tax rules in mind when going through either separation or full legal divorce. Your marital status will affect both state and federal tax returns, and without knowledge of the tax regulations, you might make costly mistakes. Consult a tax attorney or accountant if you're not sure how the regulations apply to your particular situation.
In Indiana and other states, federal income tax rules on filing status apply uniformly to divorcing couples. You must file as either married filing jointly or married filing separately as long as you are still legally married on December 31 of the tax year under consideration. If your divorce is finalized by December 31, your tax status is no longer married: you must file as an individual or head of household, and those respective tax rates will apply. The IRS holds you individually and jointly responsible for any taxes due on a joint return, no matter what your divorce decree says about who will be responsible for paying taxes. There are some exceptions, including the "innocent spouse exemption."
Head of Household and Exemptions
The federal "head of household" status is available to someone who is legally divorced. You must be responsible for more than half of the support of your dependents, and more than half of the household expenses. These guidelines are applicable to parents who have custody of their children after a divorce. In addition, only the custodial parent may claim a dependent child for purposes of figuring the federal Earned Income Credit (EIC) or for taking the IRS child tax credit. The divorce decree must settle who will be able to claim the federal deductions and exemptions for dependents, and who is entitled to any tax refunds arising from a joint return.
Indiana Filing Status
The Indiana Department of Revenue accepts tax returns and enforces the state's income-tax laws. The state allows married (but divorcing) couples to file joint returns if they remain legally married on December 31 of the tax year. If you are separated but remain legally married you may file an individual or joint return, as long as the marriage remains valid on December 31.
Innocent Spouse Exemption
Under IRS rules, a divorced spouse may file for an innocent spouse exemption. If a divorced taxpayer remains liable for taxes on a joint return for the last year of the marriage, the IRS will waive the tax liability. The state of Indiana will follow the IRS findings in granting innocent-spouse exemptions for state taxpayers, who file for it with the Indiana Innocent Spouse Allocation Worksheet (IN-40SP). Anyone claiming the exemption must show that he filed a joint tax return, and that he did not benefit from any misrepresentation on the return, or that he was unaware of taxes due on income that was not reported to him. With the innocent spouse waiver, the federal and state tax agencies allow divorced spouses to exempt themselves from taxes due on income of the other spouse during the last year of the marriage.