Should I File for Divorce Now or Wait Until After Tax Season?

Should I File for Divorce Now or Wait Until After Tax Season?

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The period between New Year’s Day and the April tax deadline often brings a unique tension to households in the Bluegrass region. While the holidays are behind us, the financial realities of the previous year are coming into focus just as marital strains may be reaching a breaking point. For many couples in Louisville, Lexington, and surrounding counties, the question isn’t just whether to divorce, but when to pull the trigger to ensure the financial fallout is manageable.

Navigating the end of a marriage involves more than just emotional separation; it requires untangling a complex web of financial obligations and assets. 

The “December 31” Rule and Your Filing Status

One of the most persistent misconceptions we encounter is the belief that you can choose your marital status for tax purposes based on what feels right. In reality, the Internal Revenue Service (IRS) and the Kentucky Department of Revenue operate under a strict “snapshot” rule. Your marital status is determined by your legal standing on the very last day of the tax year, December 31.

If your divorce decree is finalized by a judge in Jefferson Family Court or Fayette Circuit Court on or before December 31, the IRS considers you unmarried for that entire tax year. You would then file as “Single” or, if you qualify, “Head of Household.” However, if your case is still pending or hasn’t even been filed yet when the ball drops on New Year’s Eve, you are considered married for the entire year, regardless of whether you have been living in separate houses for months.

How Does My Marital Status on December 31 Affect My Kentucky Taxes?

Your marital status on the last day of the year dictates your available filing options and standard deductions for the entire tax year, regardless of how long you have lived apart. If you remain legally married on December 31, you must file as either “Married Filing Jointly” or “Married Filing Separately,” even if a divorce petition is pending; you cannot file as “Single” until the divorce decree is signed by a judge.

For couples navigating a separation, this distinction is critical for several reasons:

  • Tax Brackets: Filing jointly often provides more favorable tax brackets and a significantly higher standard deduction compared to filing separately.
  • Liability: Filing jointly means you are “jointly and severally liable” for the tax bill. If your spouse underreports income or overstates deductions, the IRS can come after you for the full amount, plus penalties and interest.
  • Cooperation Requirements: Filing jointly requires both spouses to sign the return. If communication has broken down or if there is a lack of trust regarding hidden assets, forcing a joint return may be impossible or unwise.

The Risks and Rewards of Filing Jointly During a Divorce

If you are still legally married during tax season, filing jointly is generally the most advantageous route financially, but it requires a level of trust that may no longer exist. In Kentucky, which follows equitable distribution laws, tax refunds generated from income earned during the marriage are typically considered marital assets.

Negotiating the Refund

Disputes often arise over who “earned” the refund. A high-earning spouse might argue that because their withholdings generated the refund, the money belongs to them. However, under Kentucky domestic relations law, income earned during the marriage is generally marital property. If you file jointly, the refund check will likely be issued in both names. We often see situations where one spouse intercepts the refund check and refuses to share it.

If you choose to file for divorce before the tax return is filed, we can petition the court to hold the refund in escrow or direct how it should be divided. Filing for divorce essentially puts the court on notice that financial oversight is needed. If you wait until after tax season to file for divorce, and your spouse has already spent the refund, recovering that money during the final property division can be difficult if the funds are gone.

The “Married Filing Separately” Option

If you suspect your spouse is hiding income or if the divorce is high-conflict, filing separately offers protection. It insulates you from your spouse’s tax liabilities. However, this status often comes with a higher tax bill. You lose access to certain credits, such as the Earned Income Tax Credit (EITC) and education credits, and your standard deduction is halved. This is a calculation that should be made with both a CPA and a family law attorney to ensure the cost of safety doesn’t outweigh the benefit.

Can I Deduct Legal Fees for My Divorce in Kentucky?

Generally, you cannot deduct legal fees and court costs related to a divorce on your federal or Kentucky state income tax returns, as the Tax Cuts and Jobs Act of 2017 suspended the deduction for miscellaneous itemized expenses. Legal fees are considered personal expenses, regardless of whether they were incurred to secure alimony, determine child custody, or divide property, meaning they provide no tax benefit.

While the “miscellaneous itemized deduction” that once allowed for some legal fee write-offs is gone, there are rare, specific exceptions that a tax professional might explore, though they seldom apply to a standard divorce:

  • Tax Advice: Fees specifically paid for tax advice (e.g., advice on the tax consequences of a property transfer) might be deductible if they are clearly billed separately, though this is subject to current limitations and should be verified with a tax advisor.
  • Business Expenses: If legal fees are incurred to protect a business interest that produces taxable income, a portion might be capitalized or treated differently, but this is a complex area of tax law.
  • Alimony Collection: Prior to 2018, fees to collect alimony were deductible. Under current law, since alimony is no longer taxable income for the recipient (for agreements after 2018), the expenses to collect it are generally not deductible.

Impact on Child-Related Tax Benefits

For parents in communities like Oldham, Shelby, or Bullitt counties, tax season brings significant benefits related to children: the Child Tax Credit and the Credit for Other Dependents. Who gets to claim the children?

The IRS “tie-breaker” rule generally awards the dependency exemption to the parent with whom the child lived for the greater number of nights during the year (the custodial parent). However, Kentucky courts often allocate the tax exemption between parents as part of the divorce decree, often alternating years or splitting exemptions if there are multiple children.

If you file for divorce now, before taxes are filed, we can negotiate who claims the children for the current tax year as part of a temporary order. If you wait until after tax season, and the other parent races to file first, claiming the children, untangling that mess with the IRS can take months or years.

Form 8332: The Release of Claim

It is common for the non-custodial parent to be awarded the tax exemption, especially if they are the higher earner and paying significant child support. However, the IRS does not look at your divorce decree; they look for Form 8332 (Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent). If your divorce settlement requires the custodial parent to sign this form and they refuse, having a pending divorce case allows us to seek a court order compelling them to sign.

Does the Date of Filing for Divorce Freeze My Financial Assets?

In many Kentucky jurisdictions, including Jefferson and Fayette counties, a “Status Quo Order” is automatically entered upon the filing of a divorce petition, effectively freezing marital assets and preventing either spouse from selling, transferring, or hiding property. This order prohibits changing insurance beneficiaries, draining bank accounts, or taking on unusual debt, thereby preserving the marital estate until a final settlement is reached.

The protection offered by a Status Quo Order is a compelling reason to file sooner rather than later if you fear financial misconduct.

  • Preventing Dissipation: If you wait until after tax season to file, and your spouse decides to cash out a 401(k) or sell stock to pay a “tax bill” that might be inflated, you have less immediate recourse.
  • Defining the Marital Estate: Filing for divorce creates a clear line of demarcation. Assets and debts acquired after the date of separation or filing (depending on specific circumstances) may be treated differently.
  • Discovery Process: Once the petition is filed, we have subpoena power. We can demand tax transcripts, bank statements, and credit card records to ensure the tax return your spouse presents to you is accurate.

Alimony and the “Recapture” Risk

The Tax Cuts and Jobs Act (TCJA) of 2017 fundamentally changed how alimony (maintenance) is taxed. For any divorce finalized after December 31, 2018, alimony is no longer deductible by the payer and is no longer taxable income for the recipient.

This shift simplifies the tax reporting but changes the negotiation dynamic. Since the payer doesn’t get a tax break, they may be less willing to pay a higher amount. If you are negotiating a separation agreement during tax season, it is vital to understand that “front-loading” support payments in the first three years can trigger IRS “recapture” rules if not structured correctly. This is where the collaboration between your family law attorney and a tax professional becomes essential.

Strategic Timing: When Waiting Makes Sense

Despite the protections of filing immediately, there are scenarios where waiting until April 16 (or whenever the return is filed) is the better strategic move:

  • Amicable Uncoupling: If you and your spouse are on good terms and agree to file jointly to maximize savings, waiting can reduce friction. You can file the tax return, split the refund as agreed, and then file the divorce petition with one less asset to divide.
  • Mortgage Refinancing: If one spouse intends to keep the marital home and needs to refinance to buy out the other, qualifying for a mortgage is often easier while still married and filing jointly. A pending divorce status can sometimes complicate loan underwriting.
  • Health Insurance: Once a divorce decree is entered, a non-employee spouse usually loses coverage under the other spouse’s plan immediately. If a spouse has a planned surgery in March, it may be beneficial to delay the finalization of the divorce and potentially the filing to ensure coverage remains continuous.

Strategic Timing: When Filing Immediately is Better

Conversely, waiting is not an option if financial abuse is occurring. You should consider filing immediately, regardless of tax season, if:

  • Trust is Gone: You suspect your spouse is underreporting income, which could make you liable for tax fraud if you sign a joint return.
  • Asset Drain: You see evidence that savings are disappearing or debts are increasing. The Status Quo Order is needed now.
  • Refund Theft: You believe your spouse will take the entire tax refund and hide it. Filing allows us to intercept those funds or account for them in the final division.

Navigating Your Next Steps

Deciding to end a marriage is never easy, and the added pressure of tax deadlines can make the process feel overwhelming. However, your tax return is just one piece of a much larger financial puzzle. Whether it is preserving the value of a business, dividing retirement accounts like Kentucky Teachers’ Retirement System (KTRS) pensions, or ensuring your children are provided for, the timing of your first legal step matters. At John H. Ruby & Associates, we help clients across Kentucky navigate the intersection of family law and financial reality. We can help you determine if filing now will protect your assets or if waiting offers a smoother path to resolution.

To discuss your specific situation and determine the best timing for your case, contact us at 502-373-8044 or reach out online to schedule a consultation.