Tax Implications of Divorce
Be aware that your divorce agreement can have serious tax consequences.
There are so many things to deal with during the divorce process. As you essentially work to restructure your life and reach a divorce agreement which divides your assets, please consider the long term effects of such an agreement. It is easy to get caught up in the immediate details, but how your divorce pans out can have a substantial impact on things you may not have considered, such as taxes. The tax implications of divorce can be far reaching and have a significant effect on your financial well-being.
For tax filing purposes, the time of the divorce will determine both your filing status and your tax bracket. The IRS directs that if a couple is legally married on the last day of the tax year, which is usually December 31st, then the couple will be considered married for that tax year. This is true regardless of whether your divorce is finalized before you submit your tax return. Of course, even if you are legally married on the last day of the tax year, you and your spouse may choose to file jointly or separately. Consider the pros and cons of filing jointly or separately. Filing separately may simplify some things. For example, you will only be responsible for the tax due on your own income and you are better able to ensure your tax return is accurate. However, filing separately usually means paying a higher tax rate.
When structuring your divorce agreement, you may want to consider the following and the potential tax implications at play:
- Child support: The recipient of child support may not include payments in his or her gross income. The payer is not able to take a deduction for child support payments.
- Spousal maintenance: The recipient of spousal maintenance will be included in gross income. The payer can take a deduction for payments made.
- Marital home: If you are planning to sell the marital home, consult the IRS rules on the time frame a homeowner is allowed to sell a home and buy a new one without being subjected to capital gains tax.
- Retirement accounts : There will be different tax consequences if you are dividing a retirement play or taking a lump sum payment. Different distributions from retirement accounts will be taxable.
When working through the divorce process, talk to your lawyer on ways you can minimize tax repercussions. Tax consequences can even play a significant role in negotiating a divorce settlement. You may be able to claim a tax deduction for legal fees related to seeking advice for tax consequences of divorce. At the Law Office of Kyle Whitaker, our skilled Fort Worth divorce attorneys take your financial well-being into account when guiding you through the process of divorce. This means considering all different angles of a divorce agreement, including tax consequences. Our dedicated divorce attorneys are here for you. Contact us by calling (817) 332-7703 or contact us online.