There’s a lot to consider as you navigate divorce. While property division and child custody are often top priorities when dissolving a marriage, you also have to cope with the emotional realities of your situation.
Those seeking to end their marriage often overlook the importance of addressing tax issues related to their divorce.
And when you don’t properly plan for the tax implications related to divorce, you could be hit with a large tax bill, or lose out on acquiring funds that you otherwise deserve.
Key tax considerations when pursuing divorce
Taxation is more entangled with divorce than many people realize. Don’t make the mistake of glazing over these issues. Instead, as you navigate your marriage dissolution, be sure to address the following:
- Filing status: If your divorce is finalized before December 31st, then you’ll be prevented from jointly filing your taxes for that year. This can cause you to lose out on a potentially larger tax refund that could help you establish yourself in the next phase of your life. So, if you think holding off on finalizing your divorce until after the end of the year is in your financial interests, then you might want to talk to your spouse about whether that’s something to which they’d agree.
- Accuracy of joint returns: If you and your spouse are filing a joint tax return even though you’re going through divorce, then you’ll want to double-check all the information that they provide since you and your spouse are both liable for the information on the return. This could be problematic if you and your spouse have lost trust for each other.
- Dependency exemptions: Although in many instances the parent with whom the child resides the most claims the child on taxes, this exemption can be negotiated during the settlement process. So, be sure to understand what the exemption is worth and how to best handle it in your divorce.
- Transfer of assets: While the transfer of assets at divorce should have no tax consequences, this may not be the case if transfers are improperly handled. It’s important to note, though, that selling certain assets so that proceeds can be divided could lead to significant tax obligations. So, be sure to understand the tax implications of selling marital assets, that way you have a better understanding of what you’re likely to get out of the process.
- Dividing retirement accounts: A Qualified Domestic Relations Order should prevent you and your spouse from incurring tax liabilities when you divide retirement accounts during divorce. But if you don’t understand the process that has to be followed, then you could be penalized for early withdrawal of those funds.
- Spousal support: If you pay spousal support, you won’t be able to deduct payment amounts on your taxes. If you receive spousal support, on the other hand, that income will not be deemed taxable income. You’ll want to take these facts into consideration as you navigate your divorce.
Take a comprehensive approach to your marriage dissolution
As you can see, your divorce is going to affect nearly every aspect of your life. If you want to protect your interests and your future as fully as possible, then you have to identify the issues that are implicated by your divorce and diligently work to address them in a holistic fashion. That can be hard to do when you’re unfamiliar with the divorce process and its intricacies, which is why you might find it beneficial to read up on divorce and surround yourself with any assistance you may need to get through this trying time.