What Tax Issues Will I Need to Consider During My Divorce?

 Posted on December 08, 2021 in Divorce

When you choose to get a divorce, there are many complex financial issues that you will need to address. Making the right decisions as you plan to end your marriage and proceed with the divorce process will ensure that you will have the financial resources you need as you move forward into the next phase of your life. When addressing financial matters, tax considerations are one of the key issues that you will need to address. By understanding how the decisions you make during your divorce will affect the taxes you owe and the deductions and credits you can claim, you will be able to avoid unexpected surprises and maintain financial stability in the future.

At the law firm of Weiss-Kunz & Oliver, LLC, we work closely with our clients to help them gain a complete understanding of the financial issues that will play a role in their divorce. We regularly represent clients in high net worth divorce cases, and we are familiar with the complex tax considerations that can arise when addressing ownership of property, support payments, transfers of money or property between spouses, selling real estate or other property during divorce, and other financial issues. We work to help our clients make the right decisions that will protect their financial interests throughout the divorce process and beyond.

Filing Status During and After Divorce

After your divorce is finalized, you and your spouse will be required to file taxes separately. However, before your marriage is legally terminated, you will need to determine how you will file tax returns either together or separately. By determining the correct filing status, you can determine the best ways to minimize the taxes you owe and ensure that you receive the proper tax refunds. Your options for filing taxes during your divorce may include:

• Married filing jointly - To file a joint tax return with your spouse, you will need to be legally married during the entire tax year. That is, if your divorce decree or judgment was issued on or before December 31, you will be unable to file taxes jointly for that year. However, if you did not complete your divorce during the previous year, you and your spouse may both benefit by filing your taxes together. This will generally provide you with a higher standard deduction, allowing you to receive a larger tax refund. However, you and your spouse will be jointly liable for any taxes owed on your tax return. If you choose to file taxes jointly, you will want to make sure you both understand how tax refunds or tax debts will be divided. These issues may be addressed in your marital settlement agreement, or temporary orders may be created during your divorce to detail how you will divide your refund or each spouse’s responsibility for paying taxes owed.

• Married filing separately - Filing separate tax returns may result in a higher tax rate, and you may be unable to claim certain deductions or credits. However, you will only be liable for any tax debts on your own tax return, and you will usually not be required to divide any tax refunds with your spouse. One issue to note when filing separate tax returns is the ability to claim certain deductions. If one spouse chooses to itemize deductions, the other spouse will also be required to do so, and they will not be able to use the standard deduction. A spouse will generally only be allowed to claim deductions for property taxes, mortgage interest, or other expenses that they paid individually.

• Head of household - You may be able to receive a higher standard deduction and lower tax rate if you qualify as the head of a household, and you will be able to claim the standard deduction even if your spouse itemizes deductions. To use this status, you must have lived in a separate home from your spouse for at least six months of the year, you must have paid more than half of the household expenses, and a child that you can claim as a dependent must have lived in your home for at least half of the year.

In addition to determining the correct filing status, you will also want to update your tax forms at your place of employment to ensure that income taxes are being withheld correctly. By choosing the right filing status and claiming the correct number of dependents, you can ensure that you will be able to avoid owing taxes when you file tax returns in the future.

Taxes and Property Division

As you and your spouse make decisions about the division of marital property, you will want to be aware of how taxes may apply. While you may transfer money or property between the two of you, these transfers will generally not be taxable, and in most cases, you will not be required to pay gift taxes. However, if you will be dividing the funds in retirement accounts, you will want to use a qualified domestic relations order (QDRO) to ensure that taxes will not apply to amounts withdrawn from an account before the account holder retires.

If you choose to sell certain property during your divorce, you should be aware that you may be required to pay capital gains taxes. These taxes may apply if you sell assets such as stocks or investments or transfer ownership of valuable property to other parties. Capital gains taxes may also apply if you choose to sell your home or other real estate during or after your divorce. However, an individual may exempt up to $250,000 in gains when selling real estate, and a married couple may exempt up to $500,000. By understanding the best ways to use these exemptions, you can minimize the taxes you will be required to pay when selling your home or other property.

Taxes can also be an important issue to consider for business owners. During the process of business valuation and asset division, you and your spouse will want to understand the types of deductions that the business owner will be able to claim. In some cases, carryovers may be available to a business owner, and losses from a previous year may be carried forward to subsequent tax years and used to reduce a person’s tax liability. These carryovers may address capital losses, net operating losses, charitable contributions, and other issues, and they can provide significant tax benefits for a business owner or shareholder. By understanding when these types of deductions may be available, you can make sure you will be able to divide business assets in a way that protects your financial interests.

Child Tax Credits and Deductions

If you and your spouse are parents, you will need to determine how the two of you will claim your children as dependents. A dependent can only be claimed by one person. Whether you or your spouse will claim a child as a dependent will usually depend on the decisions you make about child custody. However, you and your spouse may agree on whatever arrangements you believe are appropriate. Your options may include:

• One parent claims children as dependents - You may agree that either you or your spouse will claim your children each year. This decision may be based on what is most financially beneficial for both parties, or it may be based on where children will live the majority of the time. For example, if you are the primary custodial parent, you may be able to claim your children as dependents, since you will be responsible for paying most of the expenses related to their upbringing. However, if your spouse earns the majority of your family’s income and will be paying you child support, it may make more sense for them to claim children as dependents, since this will reduce the amount of income taxes they pay and provide them with more take-home pay that can be put toward support and other child-related expenses.

• Each parent claims one or more children as dependents - If you and your spouse earn similar incomes, and you will be sharing custody of your children, you may agree that you will each claim certain children as dependents each year. This will provide you both with tax benefits, and it can help you ensure that you will have the financial resources to meet your children’s needs going forward.

• Parents alternate claiming dependents each year - If you and your spouse have an odd number of children, you may agree that you will each be able to take advantage of tax deductions for one or more dependents in alternating years. While this will require you to make adjustments each year when filing your taxes, it can ensure that both parents will be able to share in the tax benefits that are available.

Depending on the decisions you make about claiming children as dependents, you or your spouse may also be able to claim other types of tax credits when filing your tax returns. The Child Tax Credit may be claimed by a parent who claims a child as a dependent in the same tax year. A parent can also claim the Child and Dependent Care Credit and receive a refund for payments made to a child care provider who provided care for a child 12 years old or younger.

Financial Support and Taxes

You will also need to understand how taxes may apply to any forms of support that you pay or receive. Child support is not tax-deductible for a parent making payments, and the parent who receives support payments will not be required to report these payments as taxable income or pay taxes on the amount they receive. 

For divorces finalized in 2019 or later, spousal support is treated the same as child support. Payments made are not tax-deductible, and they are not considered taxable for the recipient. However, if a divorce was finalized prior to 2019, spousal maintenance will be taxed as it had been previously, with payments being tax-deductible for the payor and taxable for the recipient. In addition, if you got a divorce before 2019, and either you or your ex-spouse has asked for a post-divorce modification that affects spousal support, these modifications usually will not affect how taxes will apply to maintenance paid or received.

Contact Our Elmhurst Divorce and Taxes Lawyers

Tax-related concerns can be a complex issue to address during the divorce process, but by taking the time to fully understand these matters, you can make decisions that will allow you to maintain ongoing financial success. Our lawyers can advise you of your rights and options regarding issues such as filing status, tax deductions, and taxes that may apply when dividing or selling property, and we will help you negotiate a divorce settlement that will meet your needs. Contact our DuPage County divorce attorneys today at 312-605-4041 to get the legal help you need as you work to dissolve your marriage.

Sources:

https://www.irs.gov/publications/p504

https://www.journalofaccountancy.com/issues/2013/apr/20126248.html

https://www.homelight.com/blog/capital-gains-tax-and-divorce/

https://www.bnymellonwealth.com/articles/strategy/dividing-tax-carryovers-in-divorce.jsp