NOTE: Although written last year when substantial tax law changes took effect, the following article continues to provide valuable information for Colorado divorcing couples wanting to maximize their tax savings during the divorce process. August andthe first part of September are periods usually allowing mediated divorces to be concluded in either the current or next tax year; the choice and timing of your divorce can have a substantial impact on your combined tax obligations.
If you are a Colorado couple with the option to conclude your divorce by year’s end or to postpone it until 2004 (as noted above, the following article written last year generally applies with respect to 2005 timing as well), proceed cautiously. New tax laws mean the timing of your Colorado divorce decree could save you hundreds, even thousands of dollars!
The federal tax code determines the filing status of couples according to their marriage / divorce status on December 31 of the relevant tax year. Prior to the changes of the new tax law — the Jobs and Growth Tax Relief Reconciliation Act of 2003 — conventional wisdom encouraged a prompt divorce (one accomplished before year’s end). By way of example, because of the so-called “marriage tax penalty,” a working, modest earnings couple without children nearly always had less combined taxes by a divorce and filing of their returns separately as “single” taxpayers.
Federal tax law changes substantially erode (and in low and moderate income cases, generally eliminate) the marriage tax penalty. Unlike past years, however, no “general rule” regarding filing status emerges, and a prudent choice on the timing of your divorce is highly dependent on your particular family’s circumstances including your individual and combined earning amounts.
Examples Of Divorce Timing On Taxes Of Colorado Couples Without Children
To illustrate, consider the following examples of how divorce timing impacts the combined taxes of Colorado couples without children, given the new federal law changes:
A couple with both parties having equivalent earnings of $60,000 annually. Filing status has minimal impact on combined taxes; divorce timing issues are not likely to be significant.
A couple with both parties having equivalent earnings of $75,000 annually. The marriage tax penalty has been reduced, but such couples concluding their Colorado divorce before year’s end are likely to achieve distinct tax savings. (With very high paid parties with equivalent earnings, these may be substantial.)
A couple with the parties earning different incomes, one with $30,000, and the second with $60,000 annually. Filing status is not as critical in the past, but deferring their Colorado divorce until 2004 and a joint filing generally creates modest tax savings.
A couple with the parties earning different incomes, one with $25,000, and the second with $150,000 annually. Generally, postponing their Colorado divorce until 2004 can save significant taxes.
These examples simply illustrate the variability of the impact of your divorce’s timing on combined taxes. Other factors such as the payment of spousal support — in Colorado divorce law called “maintenance” (see our article on the new Colorado divorce law of temporary spousal maintenance) — can influence your choice of optimal timing in this regard.
Couples Of Colorado Divorce With Children
For Colorado couples of divorce who do have children, a more complex analysis is required. The impact of parenting time (and the federal tax code’s “head of household” status), dependent exemptions, child tax credits and with lower income earning parents, the earned income credit — all must be considered in evaluating the importance of filing status and thus, the relative wisdom of accelerating or deferring your Colorado divorce’s timing. Professional tax assistance is absolutely recommended.
Colorado Divorce Law And Court Requirements
As detailed later in our website, Colorado divorce law requires a 90-day “cooling off” period, after filing for divorce and before a divorce can be granted. And, any consideration of accelerating your Colorado divorce to effect tax savings must consider whether there is sufficient time to file for the divorce and for the courts to review and grant a decree by year’s end.
Some Colorado counties’ dockets and their Magistrates and Judges calendars are more accommodating than others. Generally, this will mean you must file for your divorce by early to mid-September or so, to obtain a divorce by year’s end. Of course, if you have already filed, you may have the ability to determine (by rescheduling) whether your divorce is granted in 2003 or 2004.
Mediation And Colorado Divorce And Tax Laws
At Divorce Resolutions®, LLC, our Colorado attorney-mediators use powerful software (FinPlan’s Divorce Planner) to provide Colorado couples some basic information regarding potential taxes depending on their divorce’s timing and thus filing status. If your divorce is scheduled to occur later this year or early next year, you may wish to move forward with mediation to consider together this issue of optimizing your divorce’s timing and as the basis of a thorough review with your tax advisor, accountant or attorney.
As with other issues including discussion and determination of appropriate and equitable child and spousal support or maintenance, divorcing Colorado couples are often able to save the costs of a mediated divorce by appropriate tax planning, including issues of timing of their Colorado divorce.
As noted above, all divorce-related tax issues are dependent on your family’s unique circumstances and should be carefully considered with a Colorado tax advisor or other divorce professional. (Please see the materials at the disclaimer link below.)
Also, see our other feature articles, where we discuss in detail other Colorado legal, procedural (including divorce law and family mediation) or parenting topics. Presently, we look in depth at: