Taxes and Divorce
A divorce will impact your tax situation. Married couples often file joint returns which gives each spouse the ability to benefit from the other’s deductions. In the alternative, the combined income of a couple could lead to a greater tax burden than would otherwise be incurred by them on an individual basis. Discussions with a reputable accountant whom you trust in order to obtain specific information regarding the implications of your divorce on your taxes is recommended. It is useful to develop a relationship with an accountant independent from your spouse who can advise you regarding your personal concerns without regard to your spouse’s position.
During the divorce proceeding, while you are still legally married, you have the option of filing jointly or separately. In order to present a joint return you must be legally married on December 31 of the tax year for which you are filing. Essentially, even if you are in the middle of a contentious divorce proceeding, you are legally married until all the paperwork has been signed and filed with the court. Your accountant is the best person to advise you whether filing jointly or separately works best. However if you are considering filing a joint return you should wait until the end of the tax year to conclude your divorce.
A divorce will impact your tax situation in a variety of ways. Your filing status will change. Additionally your income and deductions will differ. Obviously, you will have less income to declare on a separate, rather than a joint, return since only individual earnings will be shown. Remember to consider the passive income of the assets you retain as part of your earnings. The deductions enjoyed by you as part of a couple may not be available on an individual basis. Children are generally claimed as dependents by only one parent. Mortgage interest and property tax deductions may be divided or eliminated. If you sell your home as a result of the divorce, a capital gains tax will result. The timing of the sale of your home can impact the amount of capital gain incurred. Individuals can only claim $250,000 of the capital gains from the sale of a home as non taxable whereas a couple can claim $500,000. A forced sale of other assets could also generate capital gains taxes.
Alimony is taxable to the person receiving it and deductible to the payer. Child support is neither taxable or deductible. In order to avoid a bigger tax burden it could be wise consider receiving less alimony and more child support.
Discussions with a reputable and trustworthy accountant are beneficial during the divorce process. Advice from a professional not connected to your ex spouse would be the best option. Understanding the implications a divorce will have on your tax situation will help you make an informed decision regarding the steps you need to take.