If you are divorcing over the next three months – that is, over the holiday season – then believe it or not, you may be divorcing at the best time of the year. This is because many judges will allow you and your soon-to-be ex to delay or speed up the divorce process, within a reasonable time, for tax purposes. For example, if the two of you filing together can take advantage of more exemptions and deductions, not to mention the preferential “married / filing jointly” tax status, you may wish to delay your divorce through the beginning of January 2014. By comparison, if your spouse failed to withhold taxes from her paycheck this year and/or you are leery of her claimed deductions and you do not want to be liable, to the IRS, for her tax debt, then you may want to divorce before the end of December 2013 so that you may file a “single” or “head of household” return.
Whether you delay or speed up the process should be a discussion you have with your attorney and tax professional, with these common issues in mind --
Filing Status – For federal tax purposes, your marital status as of December 31, 2013 will determine what filing statuses are available to you. If you are married on that day, then you may file your return with the status “married / filing jointly” or the status “married / filing separately.” Generally, the former status allows for a larger net refund, as the spouses can combine their income for tax bracket purposes. However, the joint status also means that you vouch for your spouse’s taxes, and are equally liable if it turns out the two of you must pay in, even in the event of an audit.
Dependency Exemptions – If you decide to divorce before the end of this year, then be sure your divorce decree specifies who claims what children as dependents for tax purposes. If you decree does not specify, then the parent who has more than one-half of the year with the child(ren) in custody is entitled to claim the exemption (even if the other parent paid more for child support, school, activities, healthcare, etc.) If the parents are equal, then the parent who pays child support claims the child(ren). If the time is equal and neither pays child support to the other, then the parent who has the higher AGI (which may vary annually) claims the child(ren). These are the default rules set forth in the Internal Revenue Code, and although some judges will require parents to stick with the default rules, most judges will divide the exemption(s) or encourage the parents to do so in a settlement agreement. The good news is, the IRS allows parents to do so, so long as that agreement is in writing and both parents provide certain forms at tax time.
“Married, Filing Separate” - If you are leery about what your ex has been doing this tax year, you may wish to file a separatetax return, even if you are married as of the end of the year. Always check with your attorney and a tax professional, though, because the divorce court may still treat you as responsible for a share of your ex’s as marital debt, and that debt may be less if you file a joint return and stay married through January 2014. Similarly, if your income taxes are past due, then the IRS may hold each of you accountable for a proportionate share of the entire debt, the proportion being the same proportion as your income, without a joint return.
Common Deductions- If you are looking to deduct certain expenses for your marital home, or childcare expenses, or college expenses, or even some tax preparation expenses, some of which are capped, then you should consider remaining married through the end of the year to qualify for the largest deduction. If you do not, then be sure your divorce decree specifies who can deduct what, clearly, in the event the IRS has questions for the both of you.
A carefully drafted divorce decree and/or settlement agreement is key. The agreement should specify when your divorce will be final (before or after December 31, 2013), how you and your spouse will file your taxes, what happens in the event of an audit (e.g., the wrong-doing spouse has to reimburse the other for payments made as the result of the wrong-doing), who will claim what otherwise common household deductions and exemptions, who will claim what child and what forms each will fill out to do so, and when, and, in the event of a large tax bill, whether you and your spouse will deviate from an alimony/maintenance or property settlement payment until the tax bill is paid in full.
Most of all, always speak to a CPA and an attorney. We gave you the basics here, but there are entire encyclopedias devoted to the details, and, therefore, nothing in this article should be construed as recommending a particular course of action or any illegal action or action intended to avoid taxes. The tax rules applicable to divorcing and divorced spouses are intricate and often changing – but, if you have this discussion now, you may find your divorce over the holiday season to be highly beneficial.