Tax Implications of Divorce
Selling the family home or deciding who will remain with the custody of the children are not the only aspects in which a couple that is going to divorce should take into consideration. Another important aspect of divorce to think about are the tax implications that often come with divorce.
Here we want to explain the implications that divorce can have when it comes to taxes:
- Tax Return Filing Status – Most divorce decrees state that each party is equally responsible for their own federal income tax liability and each is entitled to one-half of the federal income tax refund for any year of marriage. However, this doesn’t work in every situation. You must be certain that you have filed income tax for every year that you were married, and obtain copies of those returns for the last seven years. You should also discuss with your attorney and tax professional any risk there may be of an audit.
- Filing Your Return the Year You Get Divorced –In the year that you get your divorce, you will file a separate return because your marriage status is determined by your status on the last day of each year. You have two options for dealing with the months in which you were married during the year. You can claim only your income and none of your spouses, or during the months that you were married, you can claim one-half of your spouse’s income, deductions, and withholding and your spouse can do the same with yours.
- Child Related Issues –The IRS allows the parent who has the children for the most number of nights to claim head of household for the child. Your divorce may also state how deductions and exemptions for your child may be handled. Be sure that you work with your attorney and use this as a powerful negotiating tool during your divorce.
- Spousal Maintenance –If one party has to pay alimony to the other party, it may be taxable or non-taxable. If it is taxable, the spouse receiving the payment pays the income taxes on the money received and the paying party can deduct the payments from their tax rate. This may be beneficial to the parties involved. However, there are very specific rules that the IRS has in place regarding deducting payments. Your attorney or tax professional can explain those rules.
- Liquidating Retirement Accounts –It isn’t uncommon for one or both parties to take money out of retirement plans or accounts. When this happens, it could subject both parties to tax liability. It is important to find out whether or not any withdrawals from your retirement accounts or plans will have tax liability before you begin negotiations for your divorce settlement. Knowing the implications may have a huge impact on whether it is best to liquidate the funds, or choose some other option.
Contact an Experienced Divorce Attorney Today
If you are considering divorce and aren’t sure whether or not it could impact your tax burden, contact the Houston divorce attorneys at Lindamood & Robinson, P.C. today to schedule a consultation.