If you are considering a divorce or expecting a divorce, an ex-spouse might not be the only one who wants some of your assets.
The IRS may also want some cash. Keep reading to learn how a divorce is going to impact your taxes.
Whenever assets change hands, it will affect your taxes, and the IRS will want to know. The basics are explained below, but of course, each individual’s tax situation will be unique.
That’s one reason why anyone who is divorcing in southern California must seek the advice of an experienced California divorce attorney who can answer your financial questions.
A divorce can have a huge impact on your federal income taxes, but a little knowledge can help you avoid a lot of tax problems. A good divorce lawyer can offer the advice that you’ll need.
CAN YOU OR SHOULD YOU FILE TAXES JOINTLY OR SEPARATELY?
If your divorce is now final, you may file a joint return only if you were still legally married on the last day of the tax year (December 31st) and if you and your spouse both agree to file jointly.
Even if you were legally separated and your divorce was pending, the IRS presumes that you were married the entire year if no final divorce decree was issued on or before December 31st.
If your divorce was not finalized before the end of the tax year, your taxes will almost certainly be lower if you file a joint return.
Nevertheless, you should consult both your divorce lawyer and your tax advisor regarding the potential advantages and disadvantages of filing a joint tax return.
WILL YOU NEED A TAX INDEMNIFICATION AGREEMENT?
The primary drawback to filing jointly is that the divorcing partners become jointly liable for both the taxes and for any deficiencies, interest, or penalties.
If you file jointly, consider a tax indemnification agreement which provides that one partner is liable for any amounts due on previously-filed joint returns and which protects the other partner.
Without a tax indemnification agreement, you may not want to file jointly, because you could be held liable if the IRS determines that the return is inaccurate and the taxes were underpaid.
You and your divorce lawyer must ensure that the final divorce decree spells out precisely how you and your ex will deal with any federal tax liability or refunds.
CAN YOU QUALIFY FOR HEAD OF HOUSEHOLD STATUS?
If your divorce becomes final in the middle of a tax year or even on December 31st, the IRS treats you and your taxes as if you were unmarried for the entire year.
In that situation, your filing status will be “single” or “head of household.” To qualify for the “head of household” filing status, you must meet these criteria:
1. You were unmarried on the final day of the tax year.
2. Throughout the tax year, you paid over fifty percent of the cost of keeping up a home.
3. A “qualifying person” resided with you in the home for over half of the tax year.
4. You qualify to claim an exemption for your child.
The custodial parent is entitled to claim the exemption for the child, but the custodial parent may also agree to transfer the exemption to the non-custodial parent.
To transfer the exemption, a custodial parent must sign a statement that he or she will not claim the child as a dependent, and the non-custodial parent must attach that statement to his or her tax return.
If you file as head of household, but your divorce was not final on or before December 31st, your partner must file as “married filing separately.”
HOW ARE EARNINGS, ASSETS, AND PROPERTIES HANDLED?
California is one of only nine “community property” states. In a community property state, both spouses are legally considered the equal owners of all of the marital property.
Thus, in this state, whatever is earned or acquired by either spouse during a marriage is co-owned by both, and it doesn’t matter who actually earned it or whose name may be on a title.
So whatever you have earned or acquired during the marriage will be evenly divided in a California divorce.
Thus, the usual rule for taxes is that each spouse gets taxed for fifty percent of the income from any income-generating properties or assets.
Additionally, you must report half of the dividends and interest from any jointly-owned property or asset until the date when that property or asset is transferred entirely to you or to your spouse.
HOW DO TAXES IMPACT SPOUSAL SUPPORT – AND VICE-VERSA?
In a California divorce, whether you expect to pay alimony or expect to receive it, you must consider how alimony will impact your taxes – and vice-versa.
Currently, the law allows an ex who pays alimony to deduct it, and the law requires the ex who receives alimony to pay taxes on it. 2018, however, will be the last year alimony is handled this way.
For any divorce initiated on or after January 1, 2019, the law will become the exact reverse of the current law.
When you file in 2019, the ex who pays alimony will not be able to deduct it, and the ex who receives the alimony will not have to pay taxes on it.
Child support payments are not deductible for the paying parent and are not considered income, so a parent who receives it pays no federal income taxes on child support.
HOW CAN A DIVORCE LAWYER HELP?
Understanding what is involved and what’s at risk in a divorce can help you avoid trouble with the IRS. What you are reading here is only an introduction to the issues you’ll face.
The more complicated your finances and your spouse’s are, the more difficult it will be to hash out the tax matters and the other financial details in a divorce.
However, there is no reason to let the tax issues or the other financial matters that accompany a divorce become stumbling blocks for you.
In southern California, an experienced Long Beach divorce attorney can help.
WHEN YOUR FUTURE IS AT STAKE, GET THE HELP YOU NEED
When you divorce, you will need sound legal advice – and you’ll need an aggressive advocate in your corner. Your future will be at stake.
It is absolutely critical to get the legal help you need as early as possible in the divorce process. And it’s your right.