There is never a “good” time to separate and divorce. Even when well planned, the end of a marriage is a disruptive life event that takes time to resolve as your life continues to progress. One of the many issues that must be dealt with and considered carefully is the tax implications of a divorce.
Filing a Tax Return
Filing a tax return is one of your continued responsibilities during and after your divorce. The method and timing of your divorce and tax filing can make a difference in negotiating and finalizing your divorce. The reason is that the IRS looks at your marital status as of December 31st for the year you are filing your tax return. If you are divorced as of December 31st, then you cannot file a tax return as married.
Why does this matter? Because there are tax breaks that may benefit married couples filing a joint tax return, versus taxpayers who file as single. This includes a larger general deduction, moving into a different tax bracket, and deductions for retirement contributions. Of course, this may not benefit all divorcing couples, and depends on many factors like relative income levels, medical expenses, and other obligations.
Filing a joint tax return requires divorcing spouses to be on the same page and in agreement with the filing. The other option for a couple married as of December 31st is to file as married filing separately—which loses some of the aforementioned tax benefits—or for a qualifying spouse to file as Head of Household. Working with a family attorney and tax professional can help you understand the options in your circumstances.
Child Tax Credit
The child tax credit allows a taxpayer to receive a credit for each child they claim that is below the age of 17. Other dependents can qualify the taxpayer for an additional credit. The parent who has primary custody, or has the child the most nights out of the year, can claim this significant credit; but this credit can be transferred by agreement to the noncustodial parent as part of a divorce settlement or by order of the court.
Transfer of Community Property
When settling property via community property, it is common for property to shift from one spouse to the other. This transfer is not a taxable transaction; however, there will be capital gains taxes involved when that property is later sold. It is important to understand the tax consequences associated with assets retained after divorce.
Alimony is No Longer Tax-Deductible
Alimony used to be one of the tax advantages of divorce for paying spouses. Since World War 2, paying spouses were allowed to claim a tax deduction for alimony payments, while spouses receiving the alimony payments had to report it as income on their tax returns. This served as an incentive for spouses to agree to alimony payments that they could claim as deductions.
Beginning January 1st of last year, alimony payments stopped qualifying as a tax deduction. Further, receiving spouses no longer have to report the payments are taxable income. Thus, as with child support, there is no tax incentive when it comes to alimony payments.
Viloria, Oliphant, Oster & Aman L.L.P., Family Lawyers
If you need a family lawyer, contact Viloria, Oliphant, Oster & Aman, L.L.P. We are a client-centered law firm that takes pride in building an attorney-client relationship as a foundation of success. We believe that our clients deserve an attorney who will take the time to listen, and who will provide effective legal advice. Let us help you. Call Viloria, Oliphant, Oster & Aman L.L.P. today at (775) 227-2280 to schedule a consultation or contact our office through our website.