When you get divorced, there are many moving pieces you must juggle. Who is going to care for the children, where are you going to live, is property going to be divided fairly, how are you going to make ends meet? This is all in addition to the emotional trauma that comes with the end of a marriage. Unfortunately, a divorce begets questions about another dreaded subject matter: taxes.
Despite all of the feelings that come with the mere mention of taxes, it is well worth your while to understand how taxes and divorce interact. This is because there are potential financial benefits that come with taxes and divorce. However, you should also remain mindful of submitting proper and accurate tax returns. The absolute last thing you want following a divorce is a tax audit!
File Jointly or Separately?
Your marital status can make a big difference in your tax obligation. Married couples generally have a lower tax obligation, in part because of the deduction for married couples. In order to be able to file as a married couple, you and your spouse must still be married as of the last calendar day of the year. This makes the timing of your divorce decree incredibly important. If your divorce decree is entered on December 31st, you cannot file your taxes as a married couple. Some couples hold off on getting their divorce finalized until after the new year so they can take advantage of the tax savings.
Of course, to file a joint return, there has to be some level of trust or an agreement in place regarding the treatment of taxes. The last thing you would want is for your former spouse to take your portion of your tax refund forcing you to go to court to recover it.
Further, when filing a tax return, the dependent child tax exemption is a significant break. This generally goes to the parent with physical custody, but it can serve as a negotiating tool when reaching a post-separation agreement. In addition, parents can take deductions for medical expenses paid for the benefit of the child.
What is Taxable?
Alimony is considered income for the dependent (receiving) spouse and is therefore taxable. The spouse paying alimony can deduct the alimony payments on his or her individual taxes. The tax implications of alimony are a significant consideration when seeking court orders or reaching an agreement. A knowledgeable attorney can help account for this in a proceeding for spousal support.
What is Not Taxable?
Child support payments are not considered income and are not subject to taxes. And significantly, transfers of property between spouses that are “incident to the divorce” are generally not subject to taxes. This is a big deal. However, keep in mind that this transfer must occur within one year of the end of the marriage, or be “related to” the end of the marriage.
Contact New Direction Family Law
Separations and divorces involve intricate laws with a lot of moving parts. The decisions and actions you take now matter a great deal to your future. Let us help you navigate you through the legal process into your brighter future. At New Direction Family Law, our attorneys take pride in working hard and providing thorough, accurate legal guidance. We serve clients throughout Wake, Johnston, Durham and surrounding counties. Call New Direction Family Law today at (919) 719-3470 to schedule an appointment or visit us online at our website.
Sarah J. Hink
New Direction Family Law