Tax form next to pen on top of stack of hundred dollar bills.

Tax and divorce – probably most people’s two least favorite words, and putting them together makes for an especially lethal combination. However, at least knowing the basics about tax and divorce is a necessary evil, so we have a new article in the Colorado Family Law Guide entitled Tax and Divorce, Annulment or Legal Separation. Not the most creative title, I realize, but it does accurately describe its subject.

This post is a brief overview of how your divorce or legal separation may affect your divorce, or vice versa. For a more in-depth discussion of tax and family support issues, see our Tax Issues in a Colorado Child Support or Alimony Case article, or for the interplay between taxes and the division of property, see our Tax on Divorce Settlement article. Combined, those three articles should tell you everything you ever wanted to know about tax and divorce, some things you hadn’t thought of, and probably a few things you may not want to know.

In every dissolution of marriage case, three years of business and personal tax returns and records are among the mandatory financial disclosures. See C.R.C.P. 16.2(e)(2), and the referenced Form 35.1 Mandatory Disclosure, which requires the returns, and “all schedules and attachments, such as W-2s, 1099s, and K-1.”

Tax and Divorce – Legal Residence

In order for Colorado to enter a decree of dissolution of marriage, legal separation, or an annulment, one of the spouses must have been a legal resident of the state for at least 91 days. Normally, with two civilian spouses who both live in Colorado, this is not an issue which arises.

However, when one of the spouses is military or a family member, or one spouse lives elsewhere temporarily but may still be a Colorado resident, it is important to be able to prove that one of the spouses claims Colorado as his/her legal residence, or domicile. Among the several ways to do that are looking to see if either spouse filed a Colorado tax return (DR Form 104 or DR Form 104PN).

Residence can also be verified by which state the spouse claims as a domicile for tax purposes with their employer – see Box 15 of the W2 for their chosen state.

Excerpt from IRS Form W-2 showing state taxes

Marriage, Divorce, and Taxpayer Status

The taxpayer filing status can affect both whether there is a marriage to dissolve, and then once the marriage has ended, how the taxpayer must file future taxes. The very top of a person’s 1040 reflects their tax filing status:

Excerpt of IRS Form 1040 showing filing status

Common Law Marriage

If there is a dispute as to whether or not the parties even have a common law marriage, the trial court will consider whether the parties held themselves out as married. And one of the more important pieces of evidence in determining a common law marriage is whether they claimed to be married or single on their taxes.

If they filed as married, it’s tough for one of them to now claim there was no marriage, and when he swore to the IRS that they were married, he was really just cheating on his taxes. Similarly, if the parties always filed tax returns as single, and never claimed to be married, whichever one is now claiming marriage will have the same problem of trying to explain why she lied to the IRS.

Divorce & Tax Filing Status

How does divorce affect tax filing status?

If the couple is still married as of December 31, then they are married for purposes of tax filing, even if a divorce is pending. Conversely, if they are divorced prior to that date, then they are treated as single for tax filing purposes, even if they were married for most of the year. 26 U.S. Code § 7703(a)(1).

Legal Separation Tax Filing

Federal law treats a legal separation as a divorce for purposes of tax filing:

“an individual who is legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married.”

26 U.S. Code § 6013(d)(2)

Note that this is not the model of clarity, as the tax code uses the term “decree of separate maintenance”, rather than “decree of legal separation.” What if you have a legal separation with no maintenance being paid?

The IRS web page on “Filing Taxes After Divorce or Separation” is more explicit than the statute: “If you’re legally separated or divorced at the end of the year you must file as single for that tax year unless you’re eligible to file as head of household or you remarry by the end of the year.”

Annulment – Not Married, and Never Were!

A couple whose marriage is annulled also files as single, but with a twist. Since a “declaration of invalidity of marriage” (the legal term for an annulment in Colorado) essentially undoes the marriage as if the couple was never married, that means those tax breaks based upon their marriage must also be undone. The couple will have to file 1040X amended returns going back three years to change their status from “married” to “single.”

Per page 3 of IRS Publication 504, Divorced or Separated Individuals: “You have obtained a decree of annulment, which holds that no valid marriage ever existed. You must file amended returns (Form 1040-X, Amended U.S. Individual Income Tax Return) for all tax years affected by the annulment that aren’t closed by the statute of limitations.”

Pretty harsh, and the spouses will absolutely need to confer with a tax professional regarding exactly how to do this, and how to allocate the resulting tax burdens.

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tax and divorce

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