Married or Unmarried... it Depends

Lynda R. Schauer, CPA, CVA, CGMA

Editor's Note: Lynda R. Schauer is a principal at Zivetz, Schwartz, Saltsman CPAs in Los Angeles, California. She has 24 years' experience in both private and public accounting. She specializes in forensic and litigation support.

We have an interesting predicament when a couple has decided to file for legal separation. State law determines whether you are married, divorced or legally separated. In California family law courts, a couple who files for separation and obtains a final decree of legal separation, are still considered Married. If you choose to legally separate, neither you nor your spouse will be able to remarry without obtaining a dissolution of marriage. In other words, state law considers you to be still Married. This is not the case in the determination of filing status for preparing your income tax returns.

Both the federal and state income tax agency requirements for filing status begins with the determination of whether you are married, divorced or legally separated as of December 31st for the year of filing 1. For income tax purposes, both the Internal Revenue Service 2 and California Franchise Tax board 3 rules are the same: if the parties are legally separated under a final decree of legal separation as of December 31st, their filing status may not be Married Filing Jointly or Married Filing Separately a. They must file as Single or as Head of Household, as applicable to each of their fact patterns and relevant tax rules. For income tax purposes, you are considered Unmarried.

In advising your clients on the differences in filing a petition for legal separation or dissolution, you should consider the following for a legal separation filing:

  • If one or both do not meet California residency requirement of at least 3 months within the county and 6 months in the state for dissolution, legal separation may be a consideration as it is effective immediately.

  • There may be religious reasons preventing divorce; this alternative allows them to keep the status yet live life as if unmarried.

  • Terms of the legal separation are often the same terms as in the divorce.

  • The couple wishes to keep their status of married in order to meet the 10 year requirement to qualify for certain social security benefits of spouse.

  • There are possible tax benefits.

  • They can remain on their spouses health insurance policy.

  • It allows for a trial period as if divorced since it doesn't end the marriage in family court.

  • A spouse may retain certain military benefits.

There are some tax benefits to consider for your clients that would be advantageous to minimize the income taxes paid. For example, if there are at least two children, then each party could benefit from a reduction in income taxes paid from a filing status of Head of Household. This filing status has requirements that must be met to qualify. Another example would be to use alimony to shift the income tax burden from the tax return of the higher income spouse to the lower income spouse. By reducing the total "family" tax burden; there is more total after tax income to share.

Under Family Code §2345, the court may not render a judgment of legal separation of the parties without the consent of both parties. In California, spouses that have decided to separate may enter into a "separation" agreement, which is a legally binding contract that deals with all aspects of their separation, including issues of child support and visitation, property division and alimony. The parties can convert to a divorce either after the separation is final or any time during the legal process. Alternatively, it does allow the opportunity to reconcile and continue the marriage in the family law court.

If a couple decides to reconcile and continue their marriage, with a final decree of legal separation at December 31st; the family court still considers them Married. This poses a problem for them to use the filing status of Married Filing Jointly again. How can they overcome the Unmarried filing status? What would satisfy the taxing agencies requirement to move from Unmarried to Married filing status? Some suggestions were to set aside the final decree of legal separation by Stipulation or to have the parties remarry in another state. Neither of which appear to be a viable solution. If anyone has had this circumstance and have a solution, I'd love to hear how it was handled.

1 IRS Publication 501 2015
2 IRS Publication 504 Divorced or Separated Individuals 2015
3 FTB Pub. 1540 2014
a There is an exception if a divorce is obtained in one year for the sole purpose of filing tax returns as unmarried individuals, and the parties intend to remarry each other and do so in the next tax year, they must file as married individuals.

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