If you are going through a divorce, the first thing on your mind may not be taxes or financial issues; however, it is important to know that a divorce does have tax implications. Your filing status, tax consequences of maintenance payments, property transfers, and more are typically decided by your divorce judgment/order and affected by any new tax law changes.
A division of assets agreement should take into account any tax issues so there are no surprises later. If you are ending your marriage, a knowledgeable divorce attorney can help you prepare for any financial consequences.
When a couple negotiates how to divide marital assets or property during a divorce, it is imperative to consider the areas that may have potential tax implications. Most marital property does not incur a tax liability if transferred, but you should consider the potential tax consequences of considerations such as:
- Filing Status: Your tax filing status may depend on the time of year you file for divorce. If your divorce has been finalized at the end of the year, you will have to file as either the head of the household or single. If your divorce is not final by that time, you can file two ways: married or married filing separately.
- Spousal Support/Maintenance: Under the Tax Cuts and Jobs Act, tax law regarding spousal support (alimony) changed significantly as of January 1, 2019. For all divorces and legal separation agreements entered on or after that date, spousal maintenance can no longer be deducted by the person paying it. Furthermore, the recipient does not have to include spousal support payments as part of his or her income for a divorce entered on or after that date. This change can result in the person who is paying moving into a higher tax bracket, especially in high-asset divorces.
- Allocation of Parental Responsibilities: Commonly referred to as child custody, this allocation can include child support payments. For the paying parent, child support is not tax deductible, nor is it taxed for the custodial parent. The Child and Dependent Care Credit and the Child Tax Credit can benefit the spouse who receives child support.
- Property Division/Sale: In most cases, transferring property in a divorce is not subject to tax liability. However, real estate property that is sold for asset division—such as selling the marital home—may incur capital gains taxes.
- Retirement Accounts: The IRS has special regulations regarding splitting retirement accounts (pension, IRA, 401k) in a divorce. If you cash out your accounts early, you will typically pay taxes and penalties depending on the amount.
- Stock Options: The tax consequences of stock options is complicated and depends on whether they are considered “qualified,” which means a share option is exclusive to a company’s employee.
Contact an Elgin Divorce Lawyer
When getting a divorce, you might not initially think about the tax implications. However, it is important to know your rights and understand how taxes can affect your settlement. Our trusted Geneva divorce attorneys have over 50 years of experience and will explain the intricacies of this complex issue so your financial interests are protected. At the Law Offices of Benedict Schwarz, II P.C., we have extensive knowledge of how taxes can impact your divorce proceedings. To schedule a free consultation, call our office today at 630-200-4882.