When it comes to divorce, understanding how the IRS views marital status is crucial for filing your taxes accurately and on time. Tax rules can quickly become overwhelming during such an emotionally and financially challenging time. In his video blog, Ken Jewell breaks down some key points to help guide you through the process.
How Will My Filing Status Change Once the Divorce Is Finalized?
From the IRS’s perspective, your marital status on December 31 of the tax year determines your tax filing options. If you are still legally married on December 31, you must file either jointly or separately. However, if your divorce is finalized (meaning the judgment is signed) by that date, you can no longer file as married, whether jointly or separately. Instead, you will need to file as a single taxpayer.
This rule is based on how the IRS views a married couple—as a legal unit of two people. Once the divorce is finalized, you are no longer part of that unit and are treated as a single legal entity for tax purposes.
Can I Still File Jointly With My Spouse Before The Divorce Judgement is Signed?
Yes, as long as you remain legally married as of December 31 of the tax year, you can choose to file either as married filing jointly or married filing separately. You cannot file as single in this scenario because you are not legally single.
Filing jointly may provide benefits, such as wider tax brackets and potential deductions or credits. However, once your divorce is finalized, the IRS will treat you as a single taxpayer, and your eligibility for certain tax benefits may change as a result.
What Happens if We Don’t File Taxes Before the Divorce Is Finalized?
Failing to file your tax return on time is a serious issue, regardless of your marital status. The IRS prioritizes timely filing over prompt payment. While they may work with you to establish a payment plan if you owe taxes, failing to file completely can cause bigger problems. The IRS needs to know your status and whether a balance is owed or refundable.
If you’re delaying filing because you expect to finalize your divorce, it’s important to understand that your marital status on December 31 of the tax year determines how you file. Whether you file on time or late, the IRS uses your status on this specific date. Always prioritize timely filing to avoid complications with the IRS.
How Can We Structure Our Divorce Settlement To Reduce the Overall Tax Burden for Both Parties?
When negotiating a matrimonial settlement agreement, involving both a tax advisor and a financial advisor is essential. Their unique expertise in structuring payments, addressing tax liabilities, and identifying potential tax savings can make a significant difference. For example, capital gains exemptions are available when selling a marital home, with each party typically qualifying for a $250,000 exemption that can be applied for up to two years after the home is sold. Utilizing this exemption strategically can reduce your overall tax liability.
Matrimonial lawyers, while experts in divorce law, typically lack the specialized knowledge required to handle the complexities of taxation with precision. For this reason, leveraging the insights of financial and tax professionals is critical to navigating a divorce settlement as efficiently and cost-effectively as possible.
What Happens if One Party Cannot Afford To Pay Their Share of the Taxes Owed During Asset Division?
Typically, taxes and other expenses associated with the division of assets are paid from the gross proceeds of the asset’s sale. This ensures that the net proceeds are divided between the parties after all obligations have been met. However, there are instances where the asset may be underwater, meaning the amount owed exceeds its value.
When this occurs, there are several options. One spouse may cover the taxes and expenses on behalf of the other to ensure they are paid. Alternatively, each party might pay from their own savings, investments, or other resources. Taking out a loan is another option that some consider. For those unable to cover the expense outright, applying for a government payment plan may be the best solution. While this approach may result in interest and late payment fees, it ensures compliance with tax obligations and prevents further complications with the IRS.
If you are navigating the tax implications of divorce, contact us to discuss how we can assist you.