Divorces complicate everyone’s lives and when it comes time to file your tax return following a divorce, you should prepare yourself for the changes you can anticipate. As if tax filings are not complicated enough, following a divorce, you will need to be aware of the changes you can anticipate.
There are a number of changes which you will have to deal with following a divorce. You may be living in a different home, you may be working for the first time in decades, and you may be dealing with other changes which you did not expect.
Keep in mind, your divorce may also require you to change your overall estate plan. Most people have their spouse and children jointly listed as their heirs. Your plan may need to be modified if this is the case. Remember, you may also have to change your beneficiary designations on retirement plans and life insurance policies.
With all of the changes you will be facing following a divorce, the last thing you want is to be ill prepared for the changes you may face to your taxes. Making sure you are prepared for the tax implications of divorce is important. Here are the top five changes you can anticipate.
Understand Tax Filing Status Changes
As a newly divorced person, you will now be required to use a different filing status. Assuming your divorce is complete anytime before December 31, you will have a new filing status. Many married couples use Married Filing Jointly as their preferred method of filing. This will no longer apply, even if your divorce is finalized on December 31. Remember, tax filing status means you may be paying more taxes.
Claiming Children as Dependents
Parents who are paying child support following a divorce are not entitled to deduct these payments. Additionally, depending on who has physical custody of a child or children, there may be questions as to who has the right to claim a child as a dependent on taxes.
Typically, the custodial parent has the right to claim a child on their taxes. They also have the right to claim the Earned Income Tax Credit (EITC). Keep in mind, there may be different rules which pertain to child support payments to the custodial parent, but the fact is the parents are required to contribute to the support of their child.
Beware of Taxes on Divided Property
Thanks in large part to Internal Revenue Code (IRC)section 1041 which provides allowances for divorcing couples to claim property divisions as gifts, there may be no tax implications on a federal level depending on different factors which may impact you. Make sure you discuss property division issues and your taxes with someone who is knowledgeable about tax implications of property division.
However, if you sell assets, such as a piece of real estate, liquidate stocks, or automobiles, there may be tax implications. Real estate sales capital gains taxes may be waived under certain conditions, IRC 1021 so it is important to make sure you know how this may impact you following a divorce. Remember, there is generally an exclusion for a portion of these gains.
Qualified Domestic Relations Orders (QDRO) Pertaining to Pension Plan Divisions
When a court orders pension plans be divided between spouses, the spouse who receives benefits under the QDRO may be taxable to the recipient. The only exception which is made for these distributions is there is no withdrawal penalty.
It is important to work with an attorney who understands the tax implications of these withdrawals, whether you are the person receiving the benefits or the person who is required to pay the benefits. This may also have an impact on your overall estate planning.
Spousal Support and Legal Fees
In some cases, one spouse may be obligated to pay spousal support either in a lump sum amount, or over time. Taxation and deductibility of spousal support rules changed in 2019, so any divorce after this time results in the payer no longer being able to deduct the amount paid from their taxes, nor does the receiving party have to claim support as income.
Let’s face it, divorces can be costly and legal fees add up quickly. Some spouses wonder if the costs associated with their divorce, their legal fees, and the legal fees of their spouse if they are required to pay them, are deductible on their taxes. The answer is no, they are not deductible.
Every Divorce is Different, Every Tax Filing is Different
Just like there are no one-size-fits-all approaches to a divorce, every tax filing is different. Some divorced couples have joint business interests which may survive the divorce. Couples who have children must continue to have a strong working relationship to ensure continuity for their children.
Remember, your tax situation is going to change. At the very least, your filing status will change. The changes to your taxes must be taken seriously because you do not want to have a problem with the Internal Revenue Service, or the California Department of Revenue after going through a divorce.
Understanding the tax issues you will face ahead of time. Waiting for your tax reporting to come due and then learning you have a different tax liability than you had while you were married could be an unwelcome surprise. Making sure you are prepared is important, which means being prepared for those changes ahead of time.
Work With a Certified Family Law Specialist Today
Steven M. Bishop, is a certified family law specialist with over four decades of legal experience handling civil cases, including divorces and estate planning. We can be reached at 619-299-9780 or you may also send us an email. We represent people throughout San Diego County in a host of different family law matters. Contact The Law Offices of Steven M. Bishop, Attorney at Law today for an immediate consultation to have your questions about your divorce answered. Do not try to deal with a divorce on your own. There are too many issues which must be resolved.