Spouses have many things to consider when filing for divorce. Depending on the circumstances of the relationship, few couples will likely consider the impact the divorce has on taxes. Until it comes time to file, that is.
The best way to prepare for these changes is with a little research. Decisions divorcing couples make now can help mitigate any surprises.
Filing choices for recently divorced
Many financial issues will come up during the asset division part of the divorce. Each type of asset — housing, vehicles, investments, etc. — comes with unique tax implications. The following guidelines may help spouses divide their assets with a minimum of losses to taxes.
- Time of filing: Those considered legally divorced by year’s end must file taxes as “single” or “head of household.” Couples not divorced but with legal separation orders or a couple who lived apart for at least six months of the year may also claim one of these statuses. Those still legally married on December 31 of the filing year must use “married filing jointly” or “married filing separately.” For those looking to save money on taxes, filing jointly or as head of household generally means lower taxes.
- Alimony and child support: Couples must also consider the financial implications of the custody of children. Parenting agreements will address who pays whom, which will determine any available tax breaks and deductions. For example, child support payments are not deductible for the payer, but alimony is. For the payee, the Internal Revenue Service (IRS) considers alimony payments as taxable income, but not child support. Sometimes, payers may remit child support money in alimony payments to save on taxes, but the IRS may not approve.
- Property division: Before signing the papers, divorcing spouses may transfer property tax-free, as outlined in a property settlement agreement. When a partner buys out the other of their share of an asset, the purchaser should consider any capital gains taxes they will have to pay.
Guided advice with legal counsel
Those with questions about their divorce and its implications on filing taxes may find answers with a local lawyer familiar with divorce law. An attorney will help sort through dense paperwork and ease an often challenging and emotional process, and try to help save on taxes, too.