How Does Getting Divorced Affect Your Taxes?
During your divorce proceedings, taxes are likely the last thing on your mind. However, decisions and determinations made during your divorce can have an impact on your financial future as well as your tax filings (and not just how you file). In this article, we will discuss tax considerations concerning aspects of your divorce.
Alimony & Tax Deductions
Because of the federal Tax Cuts and Jobs Act (TJCA), alimony is not considered income (for recipients) nor is it an eligible tax deduction (for payees) if your divorce was finalized:
- After December 31st, 2018
- Before the aforementioned cutoff but was later modified
While federal law (and IRS rules) does not consider spousal maintenance to be taxable, California law allows for the paying party to deduct alimony from their state tax returns and for the receiving party to claim their alimony as income. If you signed your divorce settlement on or after January 1st, 2019, you will need to make adjustments to your state tax documents to account for any alimony paid or received.
Property Division & Taxes
In most cases, there are no immediate tax consequences for transferring or dividing assets. However, you or your ex-spouse should still consider how capital gain taxes (i.e. a tax on the profit gained via the sale of mutual funds, stocks, real estate, artwork, or other non-inventory items) can later affect you. If either of you sells the property gained in your settlement, you may owe capital gain taxes if the property value has increased from the time of acquisition. While your primary residence is exempt (in most cases), other property you obtain and want to sell may not be, which is why you should consult with an attorney concerning potential tax liabilities.
Child Support & Taxes
Child support is tax neutral, which means payments are neither deductible nor taxable. If you receive child support, you do not have to include payments in your gross income calculation, and child support payors do have to pay taxes on support payments.
Another consideration, concerning child support and taxes, is arrears. If a parent has missed child support payments, actions can be taken to ensure the missed payments are made, including intercepting their tax refunds.
Child Custody & Taxes
Claiming a child as a dependent can potentially help you reduce your taxes and allows you to claim head of household filing status, the child tax credit, earned income credit, and other tax benefits. However, only one parent can claim their child as a dependent. The parent with whom the child spends the most days during the year is who can claim the child. Even if you have joint custody, this rule still applies unless you and your partner include terms in your settlement agreement that you will alternate years that you claim the child as a dependent.
Contact Our Family Law Attorneys
At The Neshanian Law Firm, Inc, our attorney can help you make informed decisions throughout the divorce process and understand the potential tax consequences or benefits of certain decisions. We can also connect you with other experts, such as a forensic accountant or tax accountant, who can act as expert witnesses and advise you of potential financial and tax implications.
To discuss your case with a member of our team, contact us online or via phone (949) 577-7935. Let us put our skills to work for you.