It is important to understand that a divorce can have a substantial financial impact. It is recommended to seek advice to find out how to best handle any financial issues that might arise during the division of assets. Some of the most intense issues happen during the custody arrangements, child support or alimony, or the property division. It is important to remember that divorce will also affect your tax return and how you file it.
Filing Taxes after Divorce
Filing your taxes after divorce starts with determining your filing status. If you are considered legally divorced before or on the last day of the calendar year you are eligible to file as single or head of household. It is also possible to claim either one of these statuses if you are not fully divorced but you have a legally binding separation agreement or if you and your spouse have lived in separate households for at least the last 6 months of the calendar tax year. If you were not fully divorced and you filed taxes jointly, it is recommend to communicate with your soon to be ex-spouse on the best way to divide the tax return.
Alimony
Alimony is a word used for tax purposes even though it is sometimes commonly referred to as spousal support or maintenance in most states. If you are the one making alimony payments then it is possible to deduct those spousal support payments from your gross income when the time comes to file your taxes. If you are the one that is receiving the maintenance payments then they must be counted as part of your gross income when filing taxes. Spousal payments cannot count as alimony for tax purposes if the two members of the party are divorced or legally separated but still living under the same in the same household.
Division of Marital Assets
There are no immediate tax consequences should the members of the divorcing party agree to a property settlement. But if the time to sell the property come, it is possible someone in the divorce party could find a very unpleasant tax surprise. The reason is because each member of the party receives the property on its original tax basis, and a low tax basis may trigger a sizeable capital gain. A truly stable property settlement should consider more that the current market value, like the tax basis of assets.
Child Support
Child support is not considered tax-free for federal income tax purposes, meaning the parent paying and the receiving parent or child owe any taxes on it. However, unlike spousal support, child support payments made are not tax deductible by the parent who makes the payments. However, either parent may be eligible to receive a dependency exemption per child. The parent who receives the exemption depends on what arrangements the parents agree to or what the court decrees. If the paying parent is having difficulty making payments, they should seek a way to modify the support order immediately as missed payments can cause the garnishes in tax refunds.
Custody Arrangements
In the interest of taxes, physical custody is the arrangement that principally matters for the reason that the tax code gives several credits and deductions depending on where a child lives during the tax year. There is also the possibility of shared or joint physical custody but that rarely works out to an equal division of time between parents, the issue is that even if the divorce decree or custody order shows that you have shared physical custody, this might not register with the Internal Revenue Service (IRS) and could possibly not earn you a tax break.
