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What Considerations Should You Make Regarding Taxes During Your Divorce?
Whether an individual is in the middle of a divorce or considering filing for one, there are some considerations he or she should make regarding taxes. Considering the importance of tax season, now is a great time to learn more about tax issues and what potential pitfalls individuals can face.
Property Settlements and Hidden Taxes
Transferring assets between spouses during a divorce often carries no tax consequences for either party. However, depending on the basis that is invested in certain assets, there could be hidden tax consequences associated with selling that asset. Some assets that may have hidden tax consequences include investment holdings, real estate, and business interests. The tax consequences associated with these assets may end up reducing the value of the assets that appear to be worth more.
Distributing Dependency Exemptions
The IRS states that a parent who is primarily in charge of parenting a child has the right to claim that child as a dependent on his or her tax return. There is one exception to this rule, however, which is when the child’s custodial parent allocates dependency of the child to the non-custodial parent in a written document. The distribution of these exemptions and any corresponding value needs to be addressed in the divorce decree, and the value should be considered in the overall value of income between the spouses.
Filing Status Post-Divorce
Individuals are not able to file their taxes jointly for the year they get divorced. If the divorce occurs at the end of the year, it is important for both individuals to adjust their withholdings to account for the change in their filing status. If the divorce occurs earlier in the year, however, there may be no large impact on how the individuals file their taxes. The change in filing status should be considered part of the overall resolution of the divorce.
Taxability of Maintenance
In general, maintenance is taxable for the recipient and deductible for the individual making the payments. This only changes when both parties agree to change the deductibility or taxability of these payments. Unless both parties have agreed to change the taxability of maintenance payments, the individual receiving these payments should estimate tax payments and put that money aside for the income tax he or she will ultimately owe.
Taking these considerations into account can help divorcing couples minimize the potential pitfalls they may face when filing their taxes. Additionally, both parties should discuss it with their divorce lawyers as well as their financial advisors regarding which tax implications may or may not apply to them.