Now is not only a time to prepare for this year's tax season, but to make change to help ensure that next year's runs smoothly as well. A frequently overlooked strategy is that the advancement or postponement of the date of a marriage or a divorce by a single day at year’s end can make a sizable difference in the amount of your tax tab for both years. But beyond the basics are some subtle but important details.
Usually, your marital status as of Dec. 31 determines your filing status for the full year. (There’s an exception: If your spouse died during the year, you can still file a joint return.) Consequently, the IRS considers you a married person for the entire year in question, even if you wed just before the ball drops in Times Square. Similarly, the IRS considers you a single person for the entire year, even if your divorce or legal separation occurs as late as Dec. 31.
Suppose, for example, that you and your prospective mate both earn roughly the same. In that event, matrimony before the close of this year may be costly. Reason: The taxes that the two of you become obligated to pay as married on your combined incomes can turn out to be a good deal more than they would be as two unmarrieds who share lodgings and report exactly the same incomes—a law quirk known as the “marriage penalty.” But if you delay the ceremony until next year, you get a reprieve from the marriage penalty for this year.
Conversely, a marriage this year can be a smart move when one of you earns the bulk of the income or considerably more than the other. Couples with dissimilar incomes frequently reap a bonus in the form of decreased taxes.
The IRS applies comparable rules to couples who divorce. Divorce close to the end of the year, and you relinquish the benefits of joint filing for the entire year. To save taxes, you have to remain married beyond Dec. 31. What if being single is advantageous? To qualify as single, you must shed your spouse by Dec. 31.
Each year stands on its own. Married couples might be stung by the penalty in some years and enjoy a tax bonus in other years. Consider, for example, the history of the ultimate two-career couple, William Jefferson and Hillary Rodham Clinton. The Clintons were subject to the penalty for the years 1983-1992, when he received an annual salary of $35,000 as governor of Arkansas and she earned much more as a partner in a Little Rock law firm.
They reaped a bonus for the years 1993-2000, when he received an annual salary of $200,000 as president of the United States and was the sole earner in the family unit until she entered the Senate in January 2001.
Timely tips for couples contemplating divorce or legal separation. Estranged spouses who sever their ties at any time before midnight on Dec. 31 forfeit the benefits of joint filing for the entire year. Only couples who are able to grin and bear it through Dec. 31 can save taxes. What if being single provides an advantage? Then they must undo their marriage by Dec. 31.
Profiting from a yearend divorce. These tax quirks haven’t gone unnoticed by some dual income couples. To the surprise of no one but the IRS, an increasing number of these couples have journeyed to Haiti or some other equally obliging place to get a divorce in December, only to remarry in January.
Some affluent couples announced on “60 Minutes” and other national television programs—what were they thinking?!—that they slip into and out of marriage with annual quickie divorces, just so they can file as two unmarried persons and save on taxes. Even if their savings were largely offset by the divorce fees, their outlays also allowed them to frolic for a week or so in the Caribbean sun and to buy some extra nice Christmas presents for the folks back home—all courtesy of those obliging souls at the IRS.
The party poopers at the IRS issued a prim warning: Revenue Ruling 76-253 specifies that the agency will disregard a divorce obtained solely to save taxes and will require the couple to recalculate their taxes as if they had stayed married for the entire year, making the couple liable not only for additional taxes, but also for interest and possible penalties.
But a beleaguered IRS concedes that there’s nothing to stop couples from filing as single persons as long as they get a regular divorce and simply live together out of wedlock.
About the author:
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator) and an attorney. More on this topic is available from “Julian Block’s Year Round Tax Strategies,” available at julianblocktaxexpert.com.
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.