The marriage dissolution process has a lot of financial implications. There are issues such as child support, alimony/spousal support, division of marital assets, and many others. These issues will affect your finances in many ways, and one area that many divorcing couples do not put enough thought into is the tax implications once the divorce is finalized.
No matter how long you have been married, if you decide to get a divorce, it will impact your tax situation. And if you do not look at the tax consequences ahead of time, you may end up with some very unpleasant surprises when it comes time to file your taxes.
As the 2019 tax filing season comes to an end, this is a good time to look at divorce and taxes, and how a marriage dissolution can affect your tax situation.
Tax Filing Status Changes
After a divorce, your tax filing status will change. However, the filing status you use depends largely on when your divorce was finalized. If you finalized your divorce any time before December 31st, you are considered to be unmarried for the entire year. This means your tax filing options would be “single” or “head of household”.
In general, it is more advantageous to file “head of household”. However, you must meet certain qualifications to be eligible for this status. You must have paid for the upkeep of your home for at least half of the year, and you must have had at least one dependent living with you for at least half the year to claim the “head of household” status.
If you were still married as of the first of the year, your filing status options would be “married filing jointly” or “married filing separately”, or “head of household” if you lived apart from your spouse for the last six months of the year and meet other qualifications for this status.
“Married filing jointly” generally provides better tax benefits than the “married filing separately” status, although this is not always the case. That said, there are other reasons you may want to consider filing a separate return rather than filing jointly with your ex-spouse. One major reason is if your ex is untrustworthy or uncooperative or you have other reasons to believe that filing a joint return will in any way jeopardize your financial and/or tax situation.
Division of Assets
The division of the marital property is generally a tax-neutral event. However, there are some couples that have significant assets and more complicated finances. In these types of cases, various activities could result in tax consequences. For example, if you are liquidating certain assets (such as selling real estate property that does not qualify for an exemption), you may be responsible for capital gains taxes.
Another area in which there could be tax complications is with the division of retirement accounts. Portions of a retirement account that were added or appreciated during the course of a marriage are generally considered part of the marital estate. However, in order to divide these assets without being penalized by the IRS, you will most likely need a Qualified Domestic Relations Order (QDRO). QDROs are complex documents that are required for many types of retirement accounts. These documents must be drafted carefully and precisely in order to meet the required specifications to make them legally enforceable. Consult your attorney for more details on QDROs and if you will need one for your situation.
Who Claims the Children on their Taxes?
The question of who can claim the children as dependents on their taxes used to be an important issue that was often negotiated during divorce proceedings. Generally, the custodial parent is the one who has the right to claim the children unless they sign a written release on their tax return giving the other parent the right to claim the children. However, the Tax Cut and Jobs Act of 2017 got rid of personal exemptions and raised the standard deduction to make up for it. This means that there is no longer any direct financial benefit to claiming children as dependents until this provision expires in 2025.
Claiming the children as dependents is important for other reasons, however. For the custodial parent, they must have at least one dependent for at least half of the year to claim “head of household” and receive the potential benefits of this tax filing status. Having children to claim may also make you eligible for the Child Tax Credit or Child and Dependent Care Credit, and it could help you qualify for a higher Earned Income Tax Credit.
Child Support and Alimony
Child support is tax-neutral; the payor cannot deduct payments on their taxes, and the payee does not have to claim this support as income. Alimony/spousal support payments are deductible for the payor and taxable as income for the payee if your divorce was finalized on or before December 31, 2018. Under the Tax Cut and Jobs Act of 2017, however, for all divorces finalized on or after January 1, 2019, spousal support payments are now tax-neutral.
Speak with a Seasoned Divorce and Family Law Attorney in San Diego
If you are facing a divorce, there will be many issues that will need to be dealt with, many of which concern your finances and taxes. For this reason, you need a lawyer with extensive knowledge of this area of the law, and an in-depth understanding of how these issues will apply to your personal situation.
For skilled guidance with divorce and other family legal matters in San Diego, El Cajon, and throughout Southern California, call Garmo and Garmo today at 619-441-2500 or message us through our online contact form to schedule a consultation.