Divorce is one of life’s most challenging transitions, emotionally and financially. Beyond the emotional toll, there are significant financial implications that can affect your future stability. At SD Mayer & Associates, we understand the intricacies of finance and are here to help you navigate these complexities, ensuring that you make informed decisions every step of the way. Here are six tax issues to consider if you’re getting divorced.
1. Filing Status
One of the first things you’ll need to decide is your filing status. Your marital status on December 31 determines your filing status for the entire year. If your divorce is finalized by then, you’ll likely file as “single” or “head of household” (if you meet certain criteria). Otherwise, you’ll file as “married filing jointly” or “married filing separately.” Each status has different tax implications, so it’s crucial to understand which one applies to your situation.
Key Takeaway
Consult with a tax advisor to determine the most advantageous filing status for your situation.
2. Division of Assets
The division of assets can have significant tax consequences. For instance, transferring property between spouses as part of a divorce settlement usually doesn’t trigger a tax event. However, once the divorce is finalized, the recipient spouse may face capital gains taxes when they sell the property.
Key Takeaway
Work with a financial advisor to understand the tax implications of asset division and plan accordingly.
3. Alimony and Child Support
Alimony payments have undergone significant changes due to the Tax Cuts and Jobs Act of 2017. Alimony is no longer tax-deductible for the payer, nor is it considered taxable income for the recipient for divorces finalized after December 31, 2018. Child support, on the other hand, remains non-deductible for the payer and non-taxable for the recipient.
Key Takeaway
Understand the tax treatment of alimony and child support to avoid any surprises during tax season.
4. Retirement Accounts
Splitting retirement accounts can be particularly tricky. Transfers incident to a divorce are usually tax-free, but they must be done correctly to avoid penalties. For example, a Qualified Domestic Relations Order (QDRO) is needed to divide qualified plans like 401(k)s without triggering taxes and penalties.
Key Takeaway
Ensure that retirement account transfers are handled correctly to avoid unnecessary taxes and penalties.
5. Dependents and Tax Credits
Deciding who claims the children as dependents can significantly impact your taxes. The parent who claims the child can benefit from valuable tax credits, such as the Child Tax Credit and the Earned Income Tax Credit. Typically, the custodial parent claims the child, but this can be negotiated.
Key Takeaway
Negotiate and document who will claim the children as dependents to maximize tax benefits.
6. Selling the Family Home
If you’re selling the family home as part of your divorce, you may be eligible for the home sale exclusion, which allows you to exclude up to $250,000 (or $500,000 for married couples) of capital gains from your income. However, specific requirements must be met, including ownership and use tests.
Key Takeaway
Consult a tax advisor to understand and meet the requirements for the home sale exclusion.
Conclusion
Navigating the tax implications of a divorce can be overwhelming, but you don’t have to do it alone. At SD Mayer & Associates, we’re more than just accountants; we’re problem-solvers and partners in your financial success. By understanding these six tax issues, you can make informed decisions that safeguard your financial future.
Ready to take control of your financial future? Book a call with one of our expert advisors today and start your path to financial clarity and freedom.
DISCLAIMER:
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The services of an appropriate professional should be sought regarding your individual situation.
