The process of getting a divorce can be a stressful life event. Aside from the obvious personal turmoil, you will have family, business and financial matters to contend with. More specifically, you need to know the tax implications that come with splitting up. If you are divorcing, it’s important that you consider the tax details below.
1. Comb Through Your Records and Make Sure They’re All Up to Date
Make sure that your financial records are available and up to date when going through a divorce.
For starters, get a copy of your latest tax return. These tax records will set the tone for your ongoing financial decisions, and lets you know what tax obligations you have.
Pass these records along to a tax attorney or a financially-focused divorce lawyer to look after your interests during this time.
2. Know Your Tax Filing Status For the Upcoming Year
Though your relationship is over and you’re planning a divorce, you still might have to file your taxes together.
The rule of thumb is to file your return based on the status of your marriage on Dec. 31st of the previous year. So, if your divorce was completed before Dec. 31, you’re under no obligation to file jointly.
However, if you were still legally married on Dec. 31, you will still need to file your upcoming taxes as a couple.
You can then decide whether to file your tax return together, or whether it makes more sense to submit as married, but filing separately.
Never allow the confusion and uncertainty of your divorce cause you to not file your taxes, or file them late. The penalty for lay payment or non-payment isn’t worth it and is completely avoidable. You don’t want Uncle Sam coming after you while you’re already going through a tough time in life.
3. Seek Mediation For Your Divorce
Emotions are high during a divorce, which can bleed into your business matters.
When you’re both too emotionally tied to the situation to treat each other fairly, hiring a mediator is the best course of action to take. A mediator will be a third-party that isn’t attached to the situation.
Mediators are professionals that can help you push your divorce forward in a business-like manner. They can help come up with compromises that are beneficial to you both. This is crucial since the decisions you make will have tax implications for both the current and coming years.
Getting mediation for your divorce might cost between about $100 per hour and $300 per hour.
Always check around for different mediators and ensure that they are business and finance-focused.
4. Figure Out What You’re Going to Do With Property
Your biggest tax implications will likely come from the properties you both own.
Many divorcees choose to sell their marital homes in the divorce. In doing this, you’ll need to be aware of the capital gains tax.
Generally, you’re able to exclude upwards of a quarter-million dollars and will be taxed on the remainder. It’s important to do your research into what sort of tax obligations you’ll be on the hook for when it comes to other real estate, such as vacation properties.
Check into the personal property tax laws in your state and make accurate decisions on who should be helming the sale, who will retain the property, and who will be responsible for the tax bill.
5. Determine What’s Going to Happen With Applicable Tax Credits
When you split your lives, there are some tax credits that you need to be aware of.
The child tax credit is one of the most common deductions that come into play during a divorce. With this credit, the spouse that has a larger share of custody generally receives the tax break.
However, every divorce happens on a case by case basis, so the two of you will need to decide what is best. For instance, one spouse may have majority custody of the child. Meanwhile, the spouse with lesser custody may be carrying the bigger financial burden of supporting the child.
In this situation, the two of you might deem it fairer that the breadwinning spouse gets the tax break.
To make the situation more complex, the two of you may decide to split the way you handle custody every few years. So if the mother has primary custody this year, and the father gets primary custody two years from now, the dependent tax credit would then change hands.
When divorcing, the two of you need to sit down and hash these sort of matters out to figure out what is fair and best for the kids before anything else.
6. Stay Up to Date With Recent Tax Laws
The old adage says that the only things certain in life are death and taxes. Well, changes to tax laws are just as certain.
Both on the federal and state level, you can expect changes large and small in the way that taxes are handled each and every year. By staying on top of annual tax changes, you can adapt to these changes as they happen.
For instance, after 2018, alimony payments are no longer tax-deductible.
This means that those who were already divorced before then are grandfathered in and able to receive the deduction. Anyone getting divorced from 2019 forward won’t be able to deduct alimony.
There are several such tax changes that come about on a regular basis, so you need to be aware of them as they change. A skilled tax preparer will also be able to keep you abreast of these changes when divorcing.
7. Your Retirement Accounts
There are also tax implications that come into play when divorcing as it pertains to your retirement accounts.
If you are transferring a 401k, 403b, thrift savings plan, IRA or plans, you’ll need strategic advice on how to minimize your tax bill.
Likewise, you will need a tax professional to comb through your entire investment portfolio to see how these sorts of issues affect your tax bill.
In a divorce settlement, it’s very common to use retirement accounts to transfer funds. If the family court issues a qualified domestic relations order (QDRO), you might be off the hook for taxes, because it was rolled over properly.
Spouses that have acquired some stock options and other securities throughout the years need to be aware of their tax implications.
You generally don’t pay taxes on securities at the time of the transfer but will pay taxes on it once the stocks or mutual funds are sold.
8. Close Out Your Joint Credit Accounts
It’s important that you get to know other financial obligations related to your divorce. For example, it might be best to close out your joint credit accounts so that you don’t rack up any more debt.
The reason for this is that a lot of marriages end spitefully, and spiteful purchases come into play.
When an angry spouse knows that you are both on the hook for the credit card bill, they may rack up a lot of frivolously purchases to hurt you.
The best way to avoid this is by closing out the accounts entirely. Call up your creditor and figure out what you need to do to close them.
9. Handle Your Business Interests
If the two of you have joint business interests, you’ll need to address those tax implications as well.
This means determining whether to dissolve or sell the business, sign away ownership, or change the designation. The decision that you make while divorcing will have long-term implications since your tax obligations will be different based on your business classification.
For example, partnerships are often loosely filed since there’s no obligation to officially declare this classification. Splitting up a Limited Liability Company (LLC) can be trickier and will have tax burdens that come with it.
Since each business is different, dissolving these sorts of companies happen on a case by case basis. You’re both affected, so decide on the tax strategies that suit you both.
10. Get the Help of a Divorce Lawyer
Finally, be sure that you get the help of a divorce lawyer so that you have assistance with all of these matters. Be sure that your lawyer is business-oriented so that they can protect your tax and financial interests for the future.
All in all, people end up paying close to $15,000 each on the average divorce. It’s best to play this money upfront and to create the settlement that is fair.
Consultations with a divorce lawyer are free, so you’ll be able to learn about their specialties on the front end.
Address Your Financial and Tax Obligations When Divorcing
Divorcing can be heart-wrenching, but it’ll be even more difficult if you fail to address the financial and tax obligations that come with the process. Let these tips steer you in the right direction.
We’re the best when it comes to assisting you with any sort of tax help. Whether you need to get help with your taxes in the event of a divorce or want to shore up your business endeavors, we would be happy to help you out.
Feel free to contact us for all of your tax needs.