A divorce inspires a large number of practical consequences. Spouses have to split up their property. Their living arrangements frequently change. They have to settle issues related to any children that they share. There are also tax matters to consider.
Divorce can create a number of tax challenges that spouses have to address as they negotiate with one another and navigate the divorce process. Failing to make tax matters a priority could mean more financial issues for the spouses in the year or two after the divorce.
What impacts can divorce have on tax matters?
Property division can create tax obligations
The process of dividing the marital estate can sometimes create tax responsibilities. As a general rule, spouses can transfer liquid capital between themselves without worrying about gift taxes. However, the sale of marital assets can have tax implications.
The type of resources the spouses intend to liquidate and how long they have held those assets can influence what they end up paying in taxes. They may have to cover capital gains taxes when selling investments ranging from secondary real estate holdings to stocks.
Additionally, spouses have to be cautious about how they handle tax-deferred retirement accounts. The process of dividing a 401(k) could push an individual into a higher income tax bracket if they do not use the right paperwork.
Spouses often need help evaluating their marital estate and exploring how different property division issues could generate tax responsibilities. They may need to make plans for dividing tax liabilities, not just their assets.
Divorce changes income tax filings
Divorcing spouses need to prepare for complications over the next few years when they file income tax returns. For many spouses, cooperating to file a joint return until the year after the courts finalize the divorce may offer the best tax benefits. However, such arrangements are not always feasible depending on the relationship between the spouses and the likelihood of financial misconduct.
If there are minor children, spouses have to negotiate who can claim the children for income tax purposes. The spouse who has more parenting time or who maintains the primary residence used by the children can file as the head of a household, which offers numerous tax benefits. People may need to consider income tax matters when negotiating issues related to child custody. If they fail to address matters clearly, they could face rejected income tax returns or other controversies.
Discussing one’s marital estate, any shared children and other household details with a skilled legal team can help people properly prepare for the income tax complications of an upcoming divorce. People who know what to expect can limit the risk of surprise income tax obligations and other financial misfortunes after a divorce.