Divorcing clients are likely to encounter higher expenses in operating two households once they split up, but financial advisors can help them understand that intelligent tax planning may save money.
For tax purposes, the first question that advisors should explore is: When will the divorce be finalized?
“Timing is everything,” says Rosemarie Moeller, a certified financial planner and managing director at Freedom Divorce Advisors, a division of AEPG Wealth Strategies in Warren, N.J.
As far as the Internal Revenue Service is concerned, marital status on the last day of the year determines a couple’s status for the entire year. That means that if the end of the year is approaching, a couple might want to postpone the finalization of their divorce until the beginning of the next year to get tax benefits for filing jointly in the current year.
By extending their married status, a couple can keep options open for tax savings, even if there are uncertainties or disputes, Moeller says.
“If clients can’t decide because the couple can’t agree and one has to get their taxes in, they should file as married filing separately,” she says. “Because retroactively, you can always go back and file a joint return amended, but you can’t take a joint return and then amend it to separate returns; that’s not generally common knowledge.”
Sometimes, couples initially view the suggestion of postponing the final divorce negatively because they simply don’t want anything to do with each other anymore.
“They’re saying they want to get this over with yesterday, but they don’t have to be living together. They can be completely separate,” says Jerry Cohen, a certified public accountant and principal of California Divorce Financial Planning in Westlake Village.
“As long as they’re still legally married on the last day of the year, they can still file a joint return and maybe save some tax. Most people end up appreciating that,” Cohen says.
Still, in the heat of an emotional break-up, it can be difficult to get clients to focus on tax rules.
“Even when there’s an opportunity where both parties could benefit from cooperating on how to structure certain tax issues, they may not always do that,” says Cohen, whose firm works exclusively with divorcing clients. “That’s one of the challenges upfront.”
Spouses may not trust each other, and they may be leery of trying to work out tax solutions that benefit the person they are divorcing, Cohen says, but he emphasizes the importance of making clients understand that they still have a mutual interest in reducing their tax bill.
“Most of the time, even if they’re fighting about everything else, when they hear they can pay less tax, they say, ‘OK, show me how,’” he says.
Paul Hechinger is a New York-based freelance writer.
This story is part of a 30-day series on tax planning strategies.