It may never be a good time to file for divorce but thinking about the tax consequences of changing your marital status may influence the timing of a divorce. The IRS recommends all married couples determine whether filing jointly versus filing separately would result in a lower combined tax in cases where both spouses have income. If a married couple files jointly, all income, deductions and credit must be included for both spouses and both are liable for the combined tax. Conversely, married filing separately requires each spouse to report his or her own income, deductions and credits on their individual return, and each spouse is liable for their own tax. Usually filing separate returns results in a higher combined federal tax than on joint returns because of special rules that limit the ability each spouse to take certain credits or exemptions that are given married joint filers.
Although you can choose which filing status you prefer or gives you a better tax outcome, filing status options depend on marital status as of the last day of the tax year. Therefore, getting divorced before the end of the year may not be advantageous if it would significantly affect tax liability. Furthermore, a person is either married or unmarried for a whole year, not just a few days of the tax year—and a final decree of divorce by December 31st would qualify someone as unmarried for the entirety of the tax year. This is an important consideration if one or both spouses want to take advantages of deductions or credits that they might not otherwise be able to take as an unmarried filer. Also, the selection of a new Certified Public Accountant (“CPA”) by one or both of the persons divorcing is another important consideration if the couple previously filed jointly and shared one CPA.
No matter when a divorce is finalized, tax implication will likely extend into subsequent tax years. For example, divorced taxpayers are jointly and individually responsible for any tax, interest, or penalties due on jointtax returns before a divorce. This means that one spouse could be held fully liable for all missing tax even if they were not the income earner, or even where a divorce decree imposes responsibility on the former spouse for amounts due on previous joint returns.
Undoubtedly several implicit costs arise from a divorce action including ongoing alimony, financial loss through transfers of property, lack of child tax credit for a noncustodial parent, just to name a few. But legal fees and court costs, tax advice or fees to determine correct tax for alimony, personal or legal counseling, fees to pay for property settlement are added divorced costs through nondeductible expenses. And even payments made to a former spouse, not made under a legal obligation, would be treated as gifts and subject to the gift tax. Despite the plethora of tax costs and implications, alimony is the one notable deductible expense arising from divorce that has been an important consideration between persons divorcing in recent years. It is important to have a qualified team of professionals that includes a knowledgeable lawyer and CPA to assist one in navigating through the legal, and financial, untangling of a marriage. Our qualified legal team at Thomas-McDonald Law Firm stands ready to lead your team through all parts of the divorce process.