If you’re going through a divorce, you may feel that you have a lot on your plate and worrying about your taxes can be an added stressor. The impact of a divorce on your taxes is a very common concern. If you are mindful and purposeful about tax-related issues as part of your divorce or dissolution, you can set yourself up to avoid any tax surprises in the years after your divorce is final.
Generally speaking, the government provides some tax incentives to filing as a married couple, and some couples even purposefully delay the finalizing of their divorce in order to take advantage of the tax incentives one more time. Whether you are considered married or divorced for any given tax year depends on whether you are legally married – or divorced – on December 31st of that year.
You can end your marriage without increasing your taxes
Many people believe that a divorce will have a disastrous effect on their tax bill. This is not necessarily the case. If you work with an experienced family law attorney, and perhaps a financial planner, you can be strategic in the agreement you reach with your soon-to-be ex-spouse so that you can both minimize any negative tax consequences related to your divorce. You and your spouse should look at taxable assets that are part of your marital estate separately from non-taxable, or already-taxed, assets that are part of your marital estate. For example, retirement assets are typically treated differently from other assets.
If you have children, you will also need to consider tax benefits and credits that are related to the children. While married and filing joint income tax returns, you and your spouse were able to share in the tax benefit. Your divorce agreement or order must specify how the child-related tax benefits are to be treated in the future, when you and your spouse will no longer be filing joint income tax returns. For example, some divorced spouses alternate these benefits in even-numbered and odd-numbered years, or if they have multiple children, they allocate the benefits between them. This is an issue that can be negotiated as part of your divorce agreement.
Reaching an adequate financial settlement from your divorce will be crucial to the next phase of your life. Understanding the tax implications of your financial separation is important and should help to provide peace of mind that your divorce settlement will not result in any surprise tax bills down the road.