Because the Internal Revenue Service will determine your marital and filing status for the entire year based upon your marital status as of December 31 of the relevant year, time is running out if you would like to have a choice in, and possible financial benefit from, your 2015 Colorado and federal income tax filing.
It may seem odd, but even if the Colorado Divorce Court grants your divorce or legal separation in December 2015 (or at any other time in the year 2015!), the Internal Revenue Service will consider you divorced for tax filing purposes for all of tax year 2015. That means that despite all of your tax planning and employment withholdings, your 2015 tax bill may look significantly different from your expected liability or refund.
This issue is particularly relevant during this time of the year because (as discussed in a prior post), a court must wait a minimum of 91 days from the joint filing of your Petition before entering your Colorado divorce or legal separation. As a result, all couples who file for a divorce or legal separation on or after October 1, 2015 will receive their Decree after January 1, 2016 and must file as “married” taxpayers for the tax year 2015.
However, in the event that you and your spouse file for divorce or legal separation in Colorado prior to October 1, 2015, and you reach an Agreement on all issues, you may be able to elect whether the Court finalizes your divorce or legal separation in the year 2015 or 2016. Depending on your financial status and divorce agreement, including the allocation of deductions, parenting time and the tax impact of spousal support, you may have significant tax advantages for filing separate 2015 tax returns. Conversely, in some circumstances it makes greater financial sense to reach an Agreement on all issues but request that the Court enter your Decree the following year so that you and your spouse can file as married spouses.
Other issues should also be considered regarding a shared or separate filing including, income from investments, retirement account withdrawals, estimated taxes paid (or not!) as well as significant charitable contributions. Despite joint tax planning by the couple for these issues, failing to recognize and address them in the divorce can have serious financial consequences for one or both spouses.
Ultimately the most important issue is being cognizant of your choices and options. In this case, ignorance is not bliss but can be quite costly! This is also another benefit of mediation for divorcing couples – you can choose when the divorce is finalized rather than throwing that decision into the hands of the Judge.
At Split Simple, your Colorado divorce mediator will not only utilize his experience but also nationally recognized divorce tax analysis software known as “Family Law Software” to help you evaluate the most financially advantageous filing status and select the options that are the most beneficial to you. You may then strategically consult with your tax advisor regarding the best filing options. In most cases this analysis alone and the resulting decision will more than pay for the costs of your mediation with Split Simple. The vast majority of divorce mediators in the Denver metropolitan area simply do not provide this level of analysis and service to their customers. Give us a call at Split Simple today to discuss your options.