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When you decide it's time to file for a divorce, tax consequences are probably the last thing on your mind. This makes it too easy for you to miss serving your Petition in time to get a final judgment of divorce entered by December 31. And for many couples, being able to file as "single" or "head of household" might save a bundle in federal and state taxes.
This is especially true since the 1993 tax laws. Before, it was mostly high earners who worried about tax strategies. Now, increases in earned-income credit can make it pay for low earners to be free to choose "head of household" as a filing status. For example, if you and your spouse each earn $10,000 per year and have two children, you could save over $3,000 if you each file as "head of household."
But, because of the six-month waiting period for divorce, if the Petition isn't served by June 30, you cannot be divorced by December 31. You won't be free to choose options that can save you money. What to do? Simple: you can get a judgment of legal separation fairly quickly and that will give you wider tax options when next April rolls around.
Legal separation has no six-month waiting period; you can get a judgment as quickly as you can get your papers through the court (a bit sluggish in some counties). Later, you can file another action for divorce. The downside is that you have to pay a new filing fee and, possibly, the cost of having Divorce Helpline or a paralegal complete your divorce paperwork. But the tax savings may far outweigh these costs.
To find out if a legal separation will improve your bottom line, take a trip to your CPA before you take a trip to the courthouse and find out which filing status will work best for both of you. Then decide if it pays to file for separation or divorce.
More financial reasons to consider legal separation:
If a non-employee spouse has a pre-existing condition or for some other reason will not be able to get medical insurance, some plans allow you to keep a separated spouse on the employee spouse's health insurance.
To remain legally married until the ten-year deadline for certain Social Security benefits.
To remain legally married until the ten-year deadline for military pension enforcement advantages or a twenty-year deadline for PX and commissary benefits.
There is another strong reason to consider filing for legal separation rather than divorce, and it has nothing to do with money. If you or your spouse are unsure that you want a divorce, but feel that some legal space is required to gain time to think things through, filing for legal separation is a good option. It is a softer action, one that doesn't close the door so loudly on reconciliation.