Five Tax Issues to Consider During Divorce

 Posted on August 25, 2022 in Taxation Law

Getting a divorce can be a complex, difficult process. Couples who choose to end their marriage will need to address multiple types of financial issues as they divide the assets they own, establish new living arrangements, and determine how they will each be able to meet their ongoing needs. When addressing these concerns, it is important to understand the tax consequences of the decisions that are made. By working with an attorney who understands how to address divorce-related tax issues, a person can make sure they will be able to minimize their potential complications and be prepared for financial success in the future.

Tax Considerations During the Divorce Process

Spouses who are working to complete the divorce process will need to understand the best ways to address the following issues:

• Filing status - Depending on what is most beneficial for both parties, a couple may choose to file joint or separate tax returns during the divorce process. A couple will not be able to file taxes jointly for the calendar in which their divorce was finalized, but if they are still legally married at the end of a year, they may file a joint tax return for that year. If a couple does file a joint tax return, they will need to make sure they understand how to pay any tax due or divide any refund they receive.

• Credits and exemptions - Certain types of tax credits may be available to spouses, and a couple will need to determine who will be able to claim these credits following their divorce. For example, children may be claimed as dependents, but only one parent will be able to do so when filing taxes separately. While the custodial parent will typically have the right to claim children, a couple may agree on other arrangements for dividing child-related tax credits.

• Capital gains taxes - Taxes generally will not apply when property is transferred between spouses during the divorce process. However, when property is sold, capital gains taxes may apply. These taxes are based on the difference between what was paid for an asset and the current value of that asset. While portions of the profits earned from the sale of real estate property may be exempt from capital gains taxes, other types of gains may be taxable, such as the profits earned from selling stock. A couple will need to understand how the division of financial assets or other property will affect the capital gains taxes that may apply in the future.

• Retirement accounts - When money is withdrawn from accounts such as 401Ks or IRAs, taxes will typically apply. If a couple will be transferring funds from a retirement account in one spouse's name to the other spouse during their divorce, they will want to take the correct steps to avoid these taxes. For 401Ks, this can be done by using a qualified domestic relations order (QDRO). For IRAs, a "transfer incident to divorce" may be performed.

• Tax debts - A couple will both be responsible for paying any existing tax debts that accrued prior to their divorce. Even if these debts are allocated to one spouse in a divorce settlement, the IRS or the California Franchise Tax Board may pursue repayment from both spouses. Both spouses may also be liable for any amounts owed due to tax audits on joint tax returns. However, innocent spouse relief may be available in situations where a person was unaware that their former spouse had misreported information on a joint tax return.

Contact Our San Jose Tax Law Attorney

If you are in the process of divorce and have questions about how your taxes may be affected, our experienced San Jose, CA tax lawyer can help. At John D. Teter Law Offices, we understand the complex tax issues that can arise during divorce, and we are here to help you navigate these challenges. Contact us today at 408-866-1810 to schedule a consultation.

Sources:

https://www.bnymellonwealth.com/articles/strategy/eight-critical-tax-considerations-for-divorcing-couples.jsp

https://www.cpajournal.com/2022/01/03/divorce-and-tax-considerations/

https://www.irs.gov/businesses/small-businesses-self-employed/innocent-spouse-questions-and-answers