Money woes are commonly cited as a driving factor in seeking to end a marriage. But divorce brings with it its own financial impact, so it is important to understand what to expect once the process is complete.
Since tax season is here, we think it is important to help you see understand the tax implications of divorce. For instance, the timing and outcome of your divorce can have a profound impact on your tax bill. The division of assets, including real estate, retirement assets and investment property will have tax consequences you need to understand before agreeing to a particular distribution. If you ignore the tax implications of your divorce, you will likely end up with a result you regret.
Common Concerns Raised by Tax Law
State and federal taxes cover a range of activities in our lives. We often fail to realize just how complicated our taxes are until a change in circumstances forces us to ask questions.
So what tax issues arise due to divorce? That depends greatly on your specific circumstances. To give you an idea, however, here are few questions you should ask yourself, your lawyer and/or your tax advisor:
- Who claims the tax exemption for dependent children?
- Is child support taxable income?
- Is spousal support taxable income?
- How do you handle mortgage interest and property tax on a jointly owned home?
- Do you file as an unmarried person if you were married for most of the year?
- How do you handle itemized deductions, including medical expenses incurred during the year?
- If you sold property as part of the divorce process, how do you report income (or loss) from the sale?
The answers to these questions can substantially change how you feel about your divorce agreement. You could walk away from your divorce thinking that your financial wellbeing, and that of your children, is protected, only to face a tax bill you can’t support.
Understanding What Is Important To You
Family legal disputes can be stressful, emotional ordeals. Taxes may seem like the least of your worries during this difficult time. But taxes do matter, as do making smart decisions during your divorce that best serve your future.
To make smart choices, you must understand what your divorce settlement will mean for you as a practical matter. You must understand your options and the consequences of your choices to move forward in the right way for your family. If you are unclear of how to do this on your own, rely on the professionals in your life to help guide you through the process.