There’s a lot of things that you need to think about when divorcing your spouse. Things like assets, children, property and even taxes are all issues you’ll need to discuss and agree on in order to have a final divorce settlement that everyone agrees on.
While child custody and alimony are important issues when getting a divorce, you also need to consider your taxes. If you don’t consider them, both divorcing parties can face very costly and frustrating tax consequences that will hurt your finances.
When you get a divorce, you’re most likely not thinking about long-term taxes. You just want to finalize it all so that this stressful experience in life is done with and behind you. You want to get on with your new life away from your ex, but if you don’t consider taxes, your troubles will follow you.
Poor tax planning can rear its ugly head much later – even years after a divorce. Tax problems are never easy and are oftentimes very costly to resolve, only adding to your stress and headaches.
You’ll want to plan accordingly so that you and your divorcing spouse don’t have to deal with tax problems later on. Paying attention to tax issues during the negotiation and settlement process can help avoid expensive missteps so that couples can disentangle their financial lives is the easiest way possible during a divorce. Here are some helpful things you should know regarding tax consideration for divorcing spouses:
- Choose the Right Time to Divorce: Although you might want to part ways as soon as possible from your spouse, you’ll want to choose the right time to finalize everything. There are situations in which waiting to finalize it all until after December 31 can help with your taxes.
If one spouse earns a lot more than the other, having to file as single could mean a higher tax bill since the tax bracket for single tax filers is a lot less forgiving than those filing as married. But if both parties earn good money, filing jointly could place them in a higher tax bracket, thus making them pay more in the end. You’ll want to talk to a CPA regarding which route would be more financially advantageous.
- Figuring the Right Tax Filing Status: Tax filing status is determined by your marital status on the last day of the tax calendar year, which is December 31st. If the divorce isn’t finalized by the last day of the year, then the divorcing couple will need to figure out if they should file a joint return as normal or if they should file “married filing separately.”
Normally, joint tax returns could mean lower taxes for both parties. But doing so also means that both are responsible for any interest and penalties due to their taxes. After the divorce is settled, both parties can file as “head of household” if they have a dependent who lives with them. This is a better filing than “single.”
- Figuring Out Who Gets Any Tax Credits: Divorcing parties need to know the rules the IRS uses for sorting out tax credits. A dependent can’t be claimed by more than one person, which means if the divorcing party has kids, things can get messy when it comes to taxes.
A parent who has physical custody of a child is entitled to claiming the Child Tax Credit, but there are times where a non-custodial parent can claim it. Plus, it might be possible to structure the divorce settlement so that one parent gets the credit one year and then the other parent files for the credit the next.
- Transferring Property, The Best Way Possible: Usually, property transfers that are made during a divorce are non-taxable events when it comes to federal income. But there are certain situations where it might make more sense to skip the tax-free treatment and instead make it a taxable event by structuring the transfer as a “true sale,” a year after the divorce settlement is finalized. This allows the spouse who purchases the property from their ex to benefit on their taxes.
- The Value of Tax Carryovers: You’ll want to recognize the value of tax carryovers when negotiating how liabilities and assets should be divided in a divorce. These include things like net operating losses, capital losses, charitable deductions, and passive activity losses, which are all thought to have an inherent value similar to property.
You don’t want to wait until tax time to start talking about negotiations since it might be too late to benefit from the value of tax carryovers.
- The Right Solution for Alimony: Alimony payments are common in divorces. But spousal support might not always be the best option for the spouse that earns less. It might actually be better to set them up with a trust that provides them with payouts and then have those assets revert back to the grantor (or even children) if not used entirely.
When going through a divorce, you shouldn’t forget about your taxes because they will play a significant role in the divorce settlement. You’ll want to enlist the help of a local divorce attorney to help you figure out what sort of tax considerations you should plan for.
Your divorce lawyer will be able to help provide you with an objective perspective on various decisions during the divorce process. This will make the entire process a lot easier and create a settlement that’s structured with your best interests in mind.