A couple’s divorce settlement in California is not just limited to alimony and child support. They also need to consider federal tax implications and tax consequences, preferably when pursuing litigation or negotiating the settlement.
When a couple makes the decision to go their separate ways, several aspects of their life demand serious considerations. Such aspects may include selling the property (or not), child custody, pet care, and so on. These are all emotionally draining issues and can take up quite a lot of time. This is the reason why tax issues often end up being the last matter to be discussed in a divorce settlement. However, ignoring tax consequences in a divorce could be a serious error.
When couples are in an ongoing divorce proceeding, their marital status as noted on the tax year’s last day is a critical consideration. This information helps the IRS to determine the amount of tax due to each spouse. According to the IRS regulations, a married couple has the option to file in two different ways: jointly or separately. As far as the federal tax rules are concerned, “marriage” is only seen as a legal partnership between two people. If a couple’s divorce is not settled by year-end, they are considered to be “married persons”. In this case, the couple will enjoy certain tax advantages.
Property Division and Tax
The settlement of property is perhaps the most complicated tax issue in a pending divorce. It isn’t the actual division that creates problems; it is the tax implications that bring up several issues. Typically, each spouse receives whatever is left out by the other, and the remaining gross net worth of the couple is split as per the boilerplate ratios (60/40 or 50/50). Certain assets, such as loans, involve tax benefits or liabilities, and others do not.
These hassles can be avoided by hiring a divorce attorney and a tax professional that can help calculate the accurate market worth of the disputed possessions. These professionals also help after-tax values of all items along with tax bills.
Child Custody, Support and Tax
The spouse who provides child support is likely to claim reduced tax liability, but this is possible only if the spouse meets a set of requirements. The child can be claimed as a dependent on the tax return by a custodial parent (as named by the divorce order). They would qualify for exemption even if the child lived with them for a time longer than that spent with the ex in a year. A noncustodial parent may also claim tax exemption in case the other party signs a disclaimer stating that they would not claim it.
Alimony and Tax
The alimony amount is taxable for the spouse who provides it, as well as for the recipient. Therefore, it is mandatory for both parties to file tax returns separately in order to proceed with the alimony arrangements.
Information such as the Social Security Number is necessary for the ex-spouse to claim tax deductions. It is possible for the IRS to impose a penalty of $50.00 upon the party that received alimony, in case they haven’t shared their SSN with the former partner.
In cases of a rough divorce involving concerns about a spouse’s tax or financial problems, a lawyer might suggest that both parties file separately, which reduces the risk of one spouse financially harming the other. This method helps in ensuring that both parties take responsibility for the obligation and accuracy of their personal filing only, even in regard to higher federal taxes.
Maya Shulman, Esq.
Shulman Family Law Group