If you are getting a divorce, or are thinking of divorcing, you’ve probably given some thought to how you will handle the new changes. One area that will likely look a lot different is your taxes. Whenever possible, it is important to look at your financial situation both within the marriage as well as how you expect things to look once you are both on your own.
Taxes come into play when:
- Deciding how assets are to be divided, including retirement accounts. Whatever retirement accounts that are being transferred from one spouse’s name to another should be done in a way that is tax free. For assets transferred that are taxable, you’ll need to track both the value of those assets and the cost basis. One common example where this is when there have been home improvements made to a house that is transferred.
- Making provisions for continued co-ownership of a home. There are many instances where a couple may continue to own a home together and share the mortgage even after the divorce. If both are making mortgage payments, both get to deduct their payments on their separate taxes.
- Determining which filing status you will use on your income taxes after the divorce. This will change to either single or head of household. In order to claim head of household, you must have at least one qualifying child that lives with you at least half of the year. For this change to take place, your divorce needs to be finalized by December 31st. If it isn’t, you’ll still need to file one more year as married or married filing separately. Your tax advisor and attorney can help you determine what filing status makes most sense for you.
- Determining how to claim dependents. By default, the right to claim children as dependents goes to the custodial parent, but in some cases divorce decrees spell things out a little differently. Some agreements have parents alternating years where they are allowed the exemption on their taxes. While the courts can make some alterations, there are other deductions, such as the child care tax credit that will still belong to the custodial parent, even if the other parent is allowed to claim the child as a dependent.
- Managing any new tax obligations. There are some situations where you may have new tax obligations that you’ll need to keep track of. Alimony, for example, is taxable income. Unlike income from employment, it doesn’t come to you with taxes taken out, so you’ll need to be sure to save enough from those payments to properly handle your tax obligations.
When you get divorced, many things about your life will change and not everyone fully understands the financial and tax implications of going from a married person to a single person. Choosing a divorce attorney who is knowledgeable in these areas can help smooth the transition into the next chapter of your life.