Divorce is typically a difficult and stressful process that many may wish was over before it even started. In some cases, when divorces take long enough or if it happens to be timed right, your divorce may take place right smack in the middle of tax season. As if the divorce was not enough, filing joint taxes together may send you over the edge.
Divorce + taxes checklist.
If you find yourself in the middle of a divorce and you have to file your taxes, here are some key points to consider:
- Determine your filing status. One of the first boxes to check off on your return is whether you are married or single. The answer to this question may seem straightforward, but in order to check the box you have to think about the question first. The IRS wants to know what your marital status was at the end of the year you are filing your taxes for. If your divorce was not final by December 31st of the tax year you are filing for, then you must still consider yourself married.
- Decide who claims the children. Claiming the children as dependents can make a huge difference on your tab with Uncle Sam. This decision may cause a lot of contention between you and your spouse. It may be something that you want your lawyer to handle directly in order to avoid a conflict and can earn you a $4,000 exemption for each qualifying child.
- Support payments can affect your income. Any support payments, i.e. child and spousal support, made or received between spouses are treated differently. Spousal support payments are deductible by the person who makes the payments and counted as income for the person who receives the payments. Child support is not allowed to be deducted and cannot be counted as income. These rules are important to keep in the back of your head when you are working out your divorce agreement.
- Community property causes complications. Most states allow each spouse to claim only their income as their own. This is not the case in a community property state. You could be responsible for claiming part of the income your spouse earned for the tax year you are filing. This is something you should consult your attorney or accountant about.
- Your legal fees are not deductible. The IRS will not let you deduct the legal fees and court costs you spent for getting a divorce. However, you may be able to deduct legal fees paid for tax advice in connection with your divorce and legal feels to set or collect spousal support.
- Property transfers may have to be included. Normally, property transferred or received as part of a divorce settlement will not be subject to capital gain tax. However, if the property is received from a divorce settlement and later sold, you will be responsible for paying taxes on any gains. Additionally, for the property to be counted as part of the divorce, the transfer of this property must be made within a year of the date of the divorce.
Taxes typically complicate any matter, but when mixed with divorce, it can create another set of problems. This is why it’s important to talk to your attorney about the tax implications of your divorce. For knowledgeable and honest advice, contact JWB Family Law to schedule your consultation.