The Tax Consequences of a Divorce
Did you know that your divorce could influence what you pay in taxes for this year? Before you are blindsided by unexpected fees, make sure you understand how certain aspects of your divorce could impact your tax return.
You may be focusing on whether or not you will get to keep your marital home, or how to obtain custody of your child, but you should also be considering how your actions during your divorce could influence your fees as a taxpayer.
The more you know about the tax implications, the easier it will be to plan a strategy for your divorce based on smart and affordable choices.
How Do I File Taxes After a Divorce?
When to File as Single vs. Married
After your divorce, you will need to change your filing status. However, depending on when your divorce is finalized, your change in filing status might not be effective until next tax season.
- If a couple is still legally married on the last day of the taxable year, December 31st, they should file under the married status.
- If the divorce is finalized by this date, however, each spouse can file as single. Before you need to file taxes, consider whether you will be filing as single, married, or head of household.
Are there Benefits to Filing Jointly?
Couples usually receive a larger refund when they file jointly, which is why many divorcing couples choose to file jointly one last time. However, some couples who are currently going through a divorce may choose to file separately if they are concerned that the other spouse may be dishonest on their tax return.
By filing separately, you can avoid any potential liability associated with your ex-spouse. If you aren’t sure whether to file jointly or separately, consider discussing the pros and cons with your divorce attorney and your accountant.
Who Claims the Children as Dependents?
Once you and your ex-spouse begin filing your returns separately, you must discuss who will be claiming the children for the dependency exemption.
Right to Claim a Child
Typically the custodial parent will be eligible to claim the child on their tax returns - meaning the parent who acts as the primary caregiver for the child, or whomever the child spends more time with overnight.
However, it is possible that the right to claim a child could be negotiated during the divorce, legally awarding that right to one parent over the other in the final divorce decree.
Can Both Parents Claim a Child as a Dependent?
If both parents claim their child as a dependent, only the first return filed will be accepted. It is important that parents communicate these exemptions to avoid any tax issues or liabilities.
Is Child Support Taxed as Income or Deductible?
Whether you are paying or receiving support, you should understand how those payments will affect you during tax season. As a rule, child support, which is paid for the benefit of the child, not the other parent, is not a taxable income, nor is it deductible. In other words, child support is neutral and will not affect your tax return.
Is Spousal Support Taxed as Income or Deductible?
Spousal support, on the other hand, is a taxable income for the receiving spouse and it is deductible by the paying spouse. If you plan to receive spousal support, consider how the payments you collect could affect your income and could cost you when you file taxes.
Are Divided or Transferred Assets Taxed?
The way you and your spouse divide your assets could have a huge impact on your tax return. You might think you want the marital home, but taking the home could land you with a huge tax expense at the start of the year.
Before you divide your properties, consider the tax you pay on each of them and whether you will be able to afford to pay those taxes on your income alone. It is important to note that there are no tax consequences for asset transfers during a divorce. However, if you and your spouse decide to sell any assets, you could be penalized.
How Will Selling My Marital Home Affect My Taxes?
Selling a large property or asset, such as your marital home or business, could be extremely costly in the long run. Although you will get an immediate payout from the sale, you should weigh this benefit against the projected tax consequences. You could wind up paying capital gains taxes on any form of assets sold at a certain dollar amount. There is often an exemption from capital gains when the property is under a certain value, but you should determine the potential cost before you and your spouse decide to sell.
Are There Tax Penalties for Liquidating Accounts?
Some assets are more difficult to divide than others, such as your retirement account. If you and your spouse decide to liquidate an account, such as a 401k, before it is eligible, you could pay a substantial amount, (usually 10%), for your early withdrawal.
Alternatively, it might be possible to roll over the other spouse’s portion of the retirement fund for them to do with as they see fit. However, they may have to pay taxes on the account as income.
Consult Our Divorce Team for Help
Many of the decisions you make during the divorce process could have a significant impact on your taxes later on, which is why you should consider all of your options. If you are ever unsure about the potential tax consequences, always discuss your concerns with your divorce attorney.
Contact McKinley Irvin at our Oregon office to meet with our divorce lawyers to discuss your options.