When you decide to get divorced, it seems like the tough decisions never stop coming. Unfortunately, this is also true when it comes to your final divorce settlement and taxes. A number of decisions you make regarding your divorce could impact your taxes for better or for worse. Before you agree to finalizing any aspect of the divorce settlement, make sure you know how your taxes will be affected.
Having your own divorce lawyer is crucial. To discuss your case in greater detail with our experienced legal team, call Coumanis & York at 251-260-3927 to set up a consultation.
Your Filing Status
If you are not yet legally divorced by the time the end of the year rolls around, you will need to decide which filing status you and your ex-partner will use. Even if your divorce is finalized before you file your taxes, you are still considered married if you aren’t divorced by December 31. In some cases, choosing married filing separately is the ideal choice. This is especially true if your tax return offsets your spouse’s tax liability, since you probably don’t want your tax return subsidizing your ex-partner’s life. However, in general, filing married jointly is the best financial option. This, too, may come with repercussions.
Liability for Returns
This ties in closely to the first item on this list. If you and your ex choose to file jointly, you are both liable for all of the information on that return. That means that if your ex-partner lies on their tax return or doesn’t provide documentation, you are just as criminally liable as them. If you don’t trust them or have any reason to believe they might cut corners, it might be worth the extra cost to file separately.
The Child Tax Credit
Generally, the child tax credit stays with the person who has the child most of the time. If time is split 50/50, this may mean switching off years. Furthermore, there are some situations in which the non-custodial parent may take the tax credit. This should all be decided as part of the divorce negotiations.
Depending on how property is split up, you may trigger different tax situations. In general, property transfers done because of divorce don’t affect taxation. There are exceptions, though, and you should discuss your best option with your attorney.
Many people choose not to split up retirement accounts during divorce, simply because of the complications of transferring them and figuring out how they affect taxes. To transfer part or all of a retirement account, you need a QDRO from the court. This limits tax consequences. Going outside the recommended route could lead to penalties.
Assets That Are Sold
If you and your ex-partner choose to sell assets and split the proceeds rather than give the actual asset to one party, you need to look at how that could affect taxes. Consider, for example, selling a vacation home. If the home is sold and the proceeds go to you, you may get hit with a capital gains tax. This may make your divorce settlement less valuable than you think it is. This means it may also give you more leverage when it comes to negotiations.
Alimony payments are no longer a taxable/tax-deductible item since the federal tax law changes at the beginning of 2019. This means it does not positively or negatively impact the taxes of the giver or the receiver. However, in many situations, the higher-earning partner might agree to give up more in assets to avoid paying alimony. This may leave the party receiving alimony with unexpected tax consequences. For that reason, you should know exactly what you are giving up if you don’t pursue alimony and how that decision may affect you.
Prepare for Your Divorce with Coumanis & York
Divorce is stressful at best, and things can often get very messy. No matter what kind of divorce you’re anticipating, you need your own legal representation. Divorce represents a fresh start, and you don’t want to be hindered by mistakes made during the divorce process. To make the best decisions for yourself and your future, get in touch with Coumanis & York today. Call us at 251-260-3927 or contact us to set up a consultation.