Is Married Filing Separately a Good Option for Divorce Negotiations with Inherited IRA Issues?

Thanks for the quick response! I had no idea I'd lose the student loan interest deduction if we file separately. That's a significant consideration since I'm paying about $4,200 in interest annually on those loans. Do you know roughly how much that deduction is worth in tax savings? Also, with the child tax credit being reduced, would one of us still be able to claim our daughter as a dependent, or would we both lose out on that benefit?

The student loan interest deduction caps at $2,500 per year. Depending on your tax bracket, that could save you around $550-625 in actual tax dollars. So you'd need to weigh that against potentially being responsible for taxes on the inherited IRA distribution. For the child tax credit, when filing separately, only one parent can claim the child as a dependent - typically the parent with whom the child lives more than half the year. You wouldn't both lose the benefit entirely, but it would only go to one of you, and the amount is often reduced compared to filing jointly. The parent claiming the child would also be eligible for head of household status in future years once the divorce is final, which has more favorable tax rates than filing separately.

How accurate was it? I'm in a somewhat similar situation but worried about software missing something important. Did it account for all the limitations of filing separately like the student loan interest thing mentioned above?

Did you still need to use a regular tax filing service after using this? Or does it actually file your taxes too? Seems useful for the analysis part but wondering about the full process.

It was surprisingly accurate - when I eventually filed my taxes using a standard software, the numbers were almost identical to what taxr.ai predicted. And yes, it definitely accounted for the limitations of MFS like the student loan interest deduction and reduced child tax credit. It even flagged that I wouldn't be able to contribute to a Roth IRA if I went the MFS route, which I hadn't considered. For your second question, taxr.ai doesn't file your taxes - it's more of an analysis tool. After I made my decision based on its recommendations, I still used TurboTax to actually file. But having the analysis first saved me from doing everything twice in TurboTax just to compare options.

Wait, so does this service just get you to the front of the IRS phone line? How does that even work? I've been trying to get through to ask questions about my situation but always give up after being on hold forever.

Sounds fishy to me. Why would they be able to get through when regular people can't? And why would the IRS allow some third-party service to jump the queue? I'm skeptical this actually works as claimed.

It doesn't get you to the "front of the line" - they just have systems that continuously redial and wait on hold so you don't have to. When an actual IRS agent picks up, they call you and connect you to that live agent. So you're still waiting in the same queue as everyone else, but you don't have to personally sit on hold for hours. As for why it works - there's nothing special about their access. They're just willing to do the tedious work of waiting on hold that most people give up on. The IRS isn't giving them special treatment; they're just persistent with the redial technology. When I used it, I got a call back about 35 minutes later and was connected to an agent who helped clarify my inherited IRA questions.

That's excellent advice I hadn't considered. Our attorneys are still drafting the initial separation agreement, so I'll make sure to include specific language about the inherited IRA tax liability. Would it be helpful to also include language about any potential future audits related to that money?

Absolutely include language about potential future audits! You want the agreement to cover not just the current known tax liability, but any future claims, audits, penalties, or interest that might arise related to that inherited IRA distribution. It's also worth specifying that your ex must provide proof of payment of these taxes as part of the divorce settlement. That way you have documentation that the tax obligation was satisfied, which can protect you if questions come up years later. Many people don't realize the IRS can look back several years, so protecting yourself long-term is important when untangling finances in a divorce.

Great point! Your tax filing status is determined by your marital status on December 31st of the tax year. If the divorce isn't finalized by then, they'll still be considered married for tax purposes and can choose either MFJ or MFS. If it is finalized by then, they'd file as single or possibly head of household.

Thanks for confirming that. I should have mentioned I went through this last year - our divorce wasn't finalized until February this year, so we had to make the MFJ vs MFS decision for last year's taxes. We ended up filing separately despite some lost deductions because my ex had some serious tax issues I wanted to avoid. Definitely worth the peace of mind even though it cost me about $800 more in taxes.