What you Should Know About Taxes and Divorce

The sad truth is that these days plenty of marriages end in divorce. One of the biggest problems with our tax system is that it can often make stressful situations, such as divorce, even more stressful because there are plenty of tax issues related to divorce.



Tax Filing Status



Even if you spent most of the year married to your partner, if you become legally divorced on or before December 31st, you will not be eligible to file a joint return. Therefore, if you are in the process of getting divorced, which will not finalize before the end of the year, you will need to file as a married taxpayer (either a joint or separate return). If you and your former spouse are on good terms, you should try to discuss tax planning as it related to your divorce. Additionally, if you are unmarried and your spouse was not a member of the household for at least six months of the year, and you have a qualifying dependent, you may be able to take advantage of the head of household filing status.



Child Custody and Tax Exemptions



If you had children with your ex-spouse then a whole new set of tax complications may emerge depending on the specifics of your child custody arrangements. If one parent is required to make child support payments, that parent will not be able to deduct the payments on a federal return. Additionally, child support payments are not considered taxable income for the parent receiving the payments. The parent has majority custody can also claim the children as dependents, and benefit from the resulting tax incentives.



Living Situation



A home is often the most expensive purchase a taxpayer will make in their lifetime, and can result in serious financial issues during a divorce. You and your former spouse will undoubtedly need to decide what to do with the property after the divorce is finalized. One ex-spouse may decide to continue living there, possibly with dependent children, or you may decide to sell the home and split the proceeds. If you do sell the home, and profit from the sale, then you will want to reinvest those funds within two years to avoid the capital gains tax.



Divorce and Attorney Fees



There is a small category of attorney fees may be deductible expenses on your tax return. For example, although, the legal fees for the divorce itself are not deductible, legal fees related to estate planning due to a divorce may be. To be on the safe side, you should ask your attorney to divide the bill into non-deductible charges, tax-deductible alimony charges, and property settlement charges. By doing this, we will be able to help your tax preparer have sufficient proof to claim the tax deductible fees on your return.



Retirement Plans



If you or your spouse had a retirement plan that included benefits for your partner, then redistribution of funds may be required during a divorce. This will depend entirely upon the specifics of your retirement plan, and it may be negotiable during the divorce process. Keep in mind that early withdrawals from your retirement account may have nasty tax consequences, if you need to withdraw from your account early due to a divorce, you should consult with a competent tax preparer.



Tax Troubles



By now, you should know that if you file jointly, and a tax bill results, you will be held jointly liable for the tab! Unfortunately, this is true even after a divorce-for a tab acquired during the marriage. Many taxpayers will sign an indemnification clause, assuming it will protect them from an ex-spouses tax liability. So if you have tax bill, be sure to take care of this during your divorce proceedings.



The Tax Lady Roni Deutch and her law firm Roni Deutch, A Professional Tax Corporation have been helping taxpayers across the nation find IRS tax relief for over seventeen years. The firm has experienced tax lawyers who can fight IRS tax liens on your behalf.