No one wants any problems with the IRS as a result of their divorce! In any divorce case, there are tax issues both during and after divorce that need to be considered and addressed. Divorce is anguishing enough, and dealing with a tax problem thereafter is even worse. Here is some information and tips on what to consider as part of your divorce in relation to taxes:
- Division of Property
Generally, for property transfer between divorcing parties as part of a divorce settlement, there is no tax implication. That can include transfer of ownership of real property.
However, there can be tax implications when an asset like a retirement account is split. For example, to divide a 401(k) plan, you cannot simply withdraw funds from the plan without penalties and taxes. Therefore, a Qualified Domestic Relations Order is often required to divide such plans by a rollover IRA to the other spouse to avoid taxes.
- Income Tax Filing Status
If a couple is separated and going through a divorce but have not finalized the divorce, they can generally file as “married filing jointly” or “married filing separately.” However, if one of the parties is not willing to file jointly under these circumstances, that party cannot be forced to do so. Only a tax professional can truly determine what filing status makes the most sense for the parties.
The timing of entry of the divorce judgment also determines how a divorcing couple can file their taxes. If the divorce judgment is filed and entered prior to the end of the year, that judgment terminates marital status and that means the parties cannot file jointly or “married filing separately.” So it sometimes makes sense to wait to file the divorce judgment until after January 1st if the parties wish to file jointly.
After the divorce judgment has been filed, generally the divorced parties will each file as “single” or “head of household” filing status. It is important to know that pursuant to the IRS Code, a parent that has over 50% physical custody of a child is entitled to file as “head of household” and the other parent cannot. Even if the other parent has 49.9% physical custody, they are not entitled to file as “head of household.” The parent with over 50% custody is generally also entitled to claim the child as a tax exemption too.
- Child and Spousal Support
There are 2 simple rules regarding the deductibility of child and spousal support payments are as follows:
- Child support is not tax-deductible to the person paying the support, and does not have to be claimed as “income” by the receiving party.
- Spousal support (a.k.a. “alimony”) is tax-deductible to the person paying the support, much like mortgage interest. For the divorced party receiving spousal support, that party has to claim such spousal support payments on their income tax returns and will be taxed on those payments, so that party should pay accordingly and adjust their tax payments during the year pursuant to the recommendations of their tax professional.
The tax issues related to divorce can be complex, and it is highly advisable that divorcing parties consult with an experienced tax professional both during their divorce and when working towards a final divorce judgment that will include a division of property, support orders, and so on. The more information available to parties enables for a more carefully-negotiated divorce settlement that avoids tax pitfalls.
For further information or to schedule a consultation with Orange County divorce attorney Gerald Maggio of The Maggio Law Firm, please call (949) 553-0304 or visit www.maggiolawfirm.com. The Maggio Law Firm is an experienced divorce and family law firm serving the Orange County and Riverside areas and neighboring counties, serving clients with legal issues including divorce, legal separation, spousal support, child support and child custody issues.