When you separate from your spouse, you may separate your finances. You may even have obtained a legal separation from the court to protect your rights regarding assets, debts, support, and other issues. However, if you have not fully completed the divorce process, the IRS and the Ohio Department of Taxation consider your relationship to be just as solid as the day you married.
The process of separation and divorce can impact your taxes in surprising ways. It is important to remain aware of the potential changes and challenges throughout the process and after a divorce is finalized.
Consider Capital Gains Liability When Dividing Assets
Taxes are something that need to be considered at every step in the divorce process. When you are dividing assets and debts, it is important to look at the potential tax liability. If you sell an asset to divide the proceeds in divorce and the sale results in a capital gain, someone needs to account for that on their return. You can get an exemption from capital gains on the sale of your primary residence, and the amount of the exemption is twice as high for married couples filing jointly. That alone can be the primary reason for deciding how to file if your divorce is not finalized.
For assets you divide without selling, you need to consider how those assets have appreciated and whether some may have more tax liability than others. Two spouses can each claim a property with the same market value, but the net value after calculating tax liability can be very different.
Choice of Filing Status
If your divorce has not been finalized by December 31, then you are considered married for the entire year, even if you’re legally separated and have lived apart for all of that year. The IRS gives you the choice of filing status. You can file as married filing jointly, or married filing separately. In some situations, you may also have the option of filing as head of household.
It is wise to review the advantages and disadvantages with your divorce team. Consider which option might be most beneficial, but also how you will handle things if your spouse wants to do things differently. While filing jointly often has the most financial advantages, that is not always the case. Moreover, if lack of cooperation is going to make it next to impossible for you to file jointly on time, then it is probably not worth the risk.
After the divorce is finalized, you will file as single or head of household.
Additional Tax Considerations
Your financial and legal professionals can also help you address issues such as:
- Spousal support: If your divorce or separation agreement was executed before 2019, then the spouse paying alimony can treat those amounts as a tax deduction and the spouse receiving alimony will generally need to treat payments as income. However, for agreements or divorce orders executed in 2019 or later, alimony becomes largely tax neutral. The recipient does not need to declare it as income and the payor cannot deduct payments.
- Child tax credits: The IRS assumes that a parent with primary custody will be taking the applicable child tax credits. In some cases, a couple may decide that the other parent will be entitled to receive those credits, but the custodial parent must sign an IRS form in order for the other parent to claim the credit. Even if that form has been signed and the separation agreement calls for the noncustodial parent to have rights to child tax credits, if the custodial parent files a return first and claims the credits, then the agency will not accept a later return from the other parent seeking those credits.
- Tax changes: Proposed tax changes could effectively penalize married couples with elevated incomes by pushing them into a higher tax bracket and taxing capital gains at a higher rate. This could provide an incentive to accelerate a divorce in progress.
Weis Law Looks at the Big Picture in Divorce
In all honesty, taxes are probably the last thing on your mind when you’re dealing with divorce. However, the team at Weis Law Group keeps all the relevant factors in mind when our clients are making decisions regarding their divorce. We provide comprehensive guidance to help you make the right choices throughout the process. To discuss the ways we can help, contact us today.