A divorce will affect all aspects of your life, and you will be reminded of this at tax time when you file your first return post-split.
Whether you recently ended your marriage, or are planning to do so soon, it is important that you understand the major tax implications of a change in your marital status.
6 Things To Know About Divorce And Taxes
It is important to consult with a tax professional about your specific situation, but below are six ways your taxes may change when you get divorced.
- Filing status: Whether you should file your return as a married couple or a single depends on the timing of your divorce. The IRS only cares about your marital status on Dec. 31. If you were divorced on Dec. 31, you are considered single. If you got divorce on any later date, the IRS considers you married for the entire year and you should file your 2015 return as a married couple.
- Dependents and tax breaks: Exemptions for children result in significant tax deductions and credits for most parents. If you are divorced, you need to determine which parent files the exemptions. Most often, the custodial parent gets to claim the children and the associated tax breaks. However, in some cases the noncustodial parent can do so, as long as the custodial parent agrees to this. However, some child-related tax credits are not available to noncustodial parents no matter what the parents prefer.
- Reporting alimony: The paying spouse can deduct alimony payments and the recipient must report the payments as income.
- Child support: Unlike alimony, child support should neither be reported as income nor deducted.
- Exemptions for selling the marital home: It is very important to consider tax implications when deciding how to handle the marital home in your divorce. If you sell it, you need to do so quickly to take an exemption. If it takes a long time to sell, you may not meet the two-year residency requirement that is necessary to receive the full exemption. If you get the house in the divorce and sell it later, your exemption will be halved.
- 401(k) and the division of retirement benefits: It is critical to ensure you divide retirement benefits properly to avoid major tax consequences. If you take money from a retirement account to transfer it to the other spouse, that money is taxable. Your attorney should help you obtain a Qualified Domestic Relations Order to prevent tax problems.
At Danielsen Westhoff, we help our clients understand the potential financial and tax implications of divorce and property division. As you negotiate the division of marital debts and assets, you need to be aware of the long-term financial consequences of certain outcomes. Is walking away with the house really in your best interests? How can you avoid the tax implications of dividing a 401(k)? We can help you make the right decisions to protect your short- and long-term goals. Call 720-739-1770 today to schedule a free legal consultation at one of our offices in Broomfield, Denver or Golden.