Divorce is one of the hardest things that you may ever go through, both emotionally and financially.
While you are focused on your soon-to-be ex-spouse, you shouldn’t forget to keep an eye on another entity that may be after a larger chunk of your assets thanks to your split: The IRS.
Taxes impact nearly every aspect of American life, and divorce is no exception.
It’s often said that there are three parties to a divorce: 1) the husband, 2) the wife, and 3) Uncle Sam. Turns out, divorce has a huge impact on your taxes, and knowing what’s at stake can help you avoid major complications down the road.
While couples negotiate and finalize their divorce, few take time to discuss the tax impact of the decisions they are considering.
Divorce, which is difficult both mentally and emotionally, can be made worse by tax consequences foreseen and unforeseen. Tax consequences often follow every decision made in a divorce, settlement agreement or marital dispute resolution for many years.
Tax consequences are most likely from the distribution of property in a divorce. Two considerations are:
- Tax consequences which include incomes and deductions of the spouses, numbers of dependents, credits, tax rates, and the amount of tax paid to avoid penalties
- Legal liabilities, particularly those associated with a married couple filing jointly
Divorce, support and property settlement involves money and property. The wealthier the couple is, the more tax questions and issues come into play in a divorce.
Here are some of the things to keep in mind as you go through the divorce process:
- Filing status – The IRS wants to know your legal marital status as of the end of the year you’re filing for.
- Exemption for children – Who gets to claim exemptions for the children, can make a huge difference to your tax bill.
- Spousal / Child support – Cash payments are deductible by the person who makes them and are counted as income for the person who receives them.
- Retirement accounts – Your spouse may be entitled to part of your IRA or 401(k).
- Property transfers – Neither spouse will realize any capital gain or loss or other tax consequences from receiving or giving up property in a divorce decree.
- Community property – You may be treated as having earned part of your former spouse’s income during the year in which you divorce because California is a community property state.
If you have questions regarding your divorce and tax consequences that may be in store for you, contact the Family Law offices of Holstrom, Block & Parke for the answers you need. Call our offices today and get your settlement done right the first time. We can help you take advantage of the many tax advantages available to divorcing couples, and help you avoid the pitfalls.
Call us today at one of our conveniently located offices in Riverside, San Bernardino or Orange County.