How do I deal with taxes before, during, and after divorce
Divorce is a significant life event that not only affects personal relationships but can also have substantial tax implications. Understanding the possible implications can ease the transition and help each party to avoid unexpected liabilities. Here we explore how taxes intersect with marriage, the divorce process, and post-divorce life.
Chapter 1: Before the divorce
Marriage brings about tax benefits and responsibilities. Couples often benefit from filing jointly due to a higher standard deduction and tax credits. However, this also means they are jointly liable for any tax debt or discrepancies.
Even when the marriage is going well, it is important for both individuals to understand their tax filings and responsibilities. This foundational knowledge can help navigate any upheaval, from planning to take advantage of tax savings options for a child to attend college to the potential changes that can come with tax obligations during and after divorce.
Chapter 2: During the divorce
The process of divorce further complicates the already complicated process of filing tax returns. Separation means reassessing filing status, which can affect tax brackets and liability. Those going through a divorce can likely file their federal tax returns jointly or as married filing separately. It is important to consider the benefits and risks of each option before moving forward with tax filings for the year in question.
Tax law generally allows for divorcing couples to transfer property without tax ramifications. The process can be complicated, especially when dealing with retirement assets. In some cases, a separate court order called a qualified domestic relations order (QDRO) is required. Serious tax penalties can apply if transferring assets without this document; a final divorce settlement agreement is not enough.
It is also important to note that alimony payments under divorces finalized after 2018 are not deductible for the payer nor taxable to the recipient. This is an important change that may impact your negotiations during the divorce process.
Chapter 3: After the divorce is finalized
If children are present, it is important to clarify which parent gets to claim the children as dependents on their tax returns. This is often the custodial parent.
Although the transfer of assets during divorce is generally not taxed, the owner of the asset could face a steep tax bill if they sell the asset. Depending on the type of asset and details of the sale, this could include income and capital gains tax obligations. It is wise to plan appropriately for this possibility before moving forward to mitigate the risk of any surprise tax bills.
Divorce alters tax obligations significantly. From joint filing to post-divorce, taxes can be complex. Proper understanding and planning during the divorce process is essential. Remember, tax laws vary and change, and personal circumstances can significantly impact tax obligations.