When couples divorce tax issues are likely not the first issue to be addressed, but regardless of the divorcing couple’s tax awareness, such issues eventually come up. The most common tax questions for divorcing and divorced couples tend to involve whether to file jointly, the right to claim children, division of assets and child support and alimony.
One common issue recently divorced individuals ask is whether they should file their taxes jointly or as individuals. According to the IRS, whether an individual is considered married for tax purposes is determined by the person’s marital status on December 31 of the tax filing year. If the divorce is not finalized until after the New Year, then divorcing individuals may still take advantage of filing jointly. Couples whose divorce is not finalized and file a joint statement should make an agreement regarding the tax refund or deficiency.
Couples who are still going through divorce at tax time also have the option of filing as “married filing jointly” or “married filing separately.” The choice to file separately may be especially beneficial if there are concerns over whether the other spouse is reporting all of his or her income.
Head of household and child exemptions are also common tax issues for divorcing couples with children, and the two issues are related. An agreement or court order may designate which parent has the right to claim the child or children. Often, divorcing individuals with children agree to split child exemptions.
When it comes to different types of support, alimony and child support are pretty straightforward tax issues. Alimony is taxable to the person who receives the payment and is deductible to the person who pays alimony. Parties may agree otherwise and the agreement must be attached to each individual’s tax returns. Child support is not considered to be a tax event.
Finally, the tax implications of asset division are the most complicated area for divorcing individuals. Different assets have different tax attributes. Divorce agreements or court orders provide guidance on how to split applicable deductions. It is important to be aware of tax implications when creating a divorce agreement. For example, the person who keeps the marital home will be entitled to the potential mortgage or property deduction. In comparison, the party who retains an IRA or 401K will pay taxes on the profit and interest when liquidated unless taxes have already been paid as in Roth accounts.
Just as no individual’s divorce is the same, no individual’s tax situation is the same. Consult with an experienced divorce lawyer to talk about how divorce may influence your taxes.