When you’re approaching or going through a divorce, one important aspect is to consider the tax implications of your situation. Below is a brief guide to help you plan ahead, and avoid tax problems or large tax bills:
- Before your divorce is final, determine how you will file your taxes. Taxpayers are considered “married” if they are still legally married on the last day of the taxable year. You will want to determine your filing status before your divorce is final–head of household, married filing jointly, married filing separately or single. The timing of your final dissolution and your filing status can impact the amount of tax you owe or your refund. If filing jointly, you’ll also need to be aware that you are jointly responsible for any liabilities.
- Decide who receives dependent exemptions and when. If you have children, your divorce decree should include direction of which parent will receive dependent exemptions and if they will receive them for all years or alternating years depending upon your custody agreement.
- Address division of property or assets. Division of property like real estate or even business assets should be addressed during your divorce. If you receive proceeds from the sale of your home, you may be responsible for paying capital gains taxes. It’s best to have an accountant help you to review your property settlement when facing complex situations involving division of property or assets.
- Understand implications of retirement account changes. If a retirement account is divided in a divorce, a QDRO, or qualified domestic relations order, is issued to divide the account based on the Court’s order. Depending on the type of retirement account, there may be instances in which funds can be withdrawn without penalty. You may also want to reassess your retirement account plans after a divorce.
- Child Support has no tax consequences. If you are ordered to pay child support, your contribution is not tax-deductible and if you receive child support, your income is not taxable.
- Maintenance and alimony does have tax consequences. If you are ordered to pay alimony to your former spouse, your payments are deductible on your tax return. If you receive alimony from your former spouse, then you will have to count it as taxable income.
If you are considering filing divorce or going through a divorce currently, schedule an appointment with the team at MCK CPAs, to discuss your specific situation and any tax implications.