Only the savvy would take a moment to wonder if there are tax implications during divorce. Divorce is an emotional roller coaster, and stepping back to review the logistics is not always easy. If you are taking the time to read this post, then you are already on the right track. The first step is to learn how the issue could impact your situation. The next is to take steps to mitigate the impact.
#1: What role do taxes play during divorce?
There are certain factors to consider regarding taxes during divorce. These include:
- Filing status. Filing status is based on your marital status as of December 31 of the tax year. If you finalize your divorce by the end of the year, you file as single. You may qualify for head of household status if your spouse did not live in the home for the last six months of the year, you pay more than half the cost of maintaining a home, and have a qualifying dependent living with you for more than half the year.
- Dependent exemptions. Generally, the custodial parent claims the child as a dependent. However, parents can agree to allow the non-custodial parent to claim the exemption by signing IRS Form 8332.
- Tax Credits: It is important to discuss which party takes certain tax credits. The Child Tax Credit is often taking by the parent who claims the child as a dependent. It can reduce your tax liability significantly. Another to discuss is the Earned Income Tax Credit (EITC), generally the custodial parent claims this credit.
These are a few of the tax issues that can impact divorce. It is important to review your specific situation to see if others may apply.
#2: How can I mitigate the risk of a surprise tax issue after my divorce is finalized?
In addition to planning for the factors discussed above, it is also wise to review all financial transactions for any potential tax obligations. Take the family home as an example. If you plan to keep the home and sell it shortly after divorce, you will likely be on the hook for any applicable capital gains taxes. Instead, it may be wise to sell during the divorce so the parties can split the bill or otherwise negotiate a resolution before you finalize the divorce. The choice is ultimately yours, but reviewing the potential impact can help to better ensure you plan for any future tax obligations and do not get a surprise tax bill.
