Divorcing spouses should be aware of certain tax law implications during the calendar year of their divorce. Tax law provides that in the year of your divorce, you must claim half of your spouse’s income and half of your spouse’s withholding for the portion of the year that you remained married. It is a complex tax law; you can read about it in Wisconsin Department of Revenue Publication 113.
Wisconsin law allows you to opt out of sharing income and withholding in the year that you get divorced by signing an Income Reclassification Agreement with your spouse prior to January 1, classifying your income as of January 1 as your individual income. In most cases, entering an Income Reclassification Agreement will simplify the process of preparing your taxes in the year of your divorce. It also may relieve you of the obligation to share your financial information with your spouse once your divorce is final.
Sometimes, however, it is not in one spouse’s financial interest to enter an Income Reclassification Agreement. In the most common scenario, one spouse is a high-income earner and the other earns much less, perhaps less than $50,000 per year. Under those circumstances, without an Income Reclassification Agreement the high-income spouse could end up in a lower tax bracket.