Essentially all aspects of your life will be affected by your divorce, including your taxes. Given that many tax laws hinge on one’s marital status, it is imperative to understand the impact your divorce will have on your taxes. Here is what you need to know about the tax changes you will face in the aftermath of your divorce:
- Marital Status: As mentioned above, this is the most obvious and immediate changes you will have to make on your tax return when you get divorced. The IRS will check to see if you were married on December 31 to determine if you need to file as a married or single taxpayer. Therefore, if you divorced late in the year, you will be treated as unmarried for the entire year. However, if you divorced in January, you will need to file as a married couple.
How your filing status affects your total tax liability will depend on your own personal circumstances. In some cases, one might have their taxes reduced if they suffered from a marriage penalty due to joint income. Those who earned a marriage bonus due to large disparities in spousal income will usually see a rise in their taxes after their divorce. If you and your ex-spouse have children and you qualify for head of household status, this can reduce your taxes greatly.
- Family Tax Breaks: For those who have children that qualify as tax dependents, you and your ex-spouse will have to decide which parent gets to claim the exemption for them. Exemptions not only get you a reduction on taxable income, but also help drive which parent can claim lucrative tax credits.
As a general rule, the custodial parent gets to claim a dependent and receives the associated credits. In some cases, non-custodial parents can claim exemptions if the custodial parent agrees. Regardless of what either parent prefers, some tax breaks, such as the Child and Dependent Care Credit, may only be received by the custodial parent.
- Alimony and Child Support: If you end up having to make alimony payments, you will be able to deduct those payments. On the other hand, a spouse who receives alimony must include them as taxable income.
Child support payments do not have an impact on taxes, regardless if you are the payer or the recipient.
- The Home: If you are jointly filing your taxes, you can exclude as much as $500,000 from the sale of your residence. If you are filing as a single taxpayer, however, this is reduced to $250,000. If both you and your ex-spouse are able to agree on selling the home quickly, this should work out. Problems might arise if both parties move out of the home, it takes a long time to sell, and a failure to meet the two-year residency rule over the preceding five years reduces or eliminates the exemption. Plan wisely and both you and your ex-spouse will be able to achieve a result that is favorable.
- Retirement Accounts: This is typically one of the biggest assets a couple has and is often the most complex. You cannot just take money out of these accounts to transfer it to your ex, or it will be treated as a taxable distribution. To effectively address this issue, you can get a Qualified Domestic Relations Order (QDRO) from the court handling your divorce. This will authorize your employer to transfer the agreed portion of your 401(k) account to your ex without suffering tax consequences.
Divorce Attorney in Midlothian and Glen Allen
Deciding to move forward with a divorce can be difficult and working out the details of a settlement is often emotional and financially stressful. At DeFazio Bal, our Midlothian and Glen Allen divorce attorneys are committed to providing quality representation to our clients. You can be confident in our ability to guide you toward the least complex solution possible.
Contact us today at (804) 250-3729 to get started on your case.