The Tax Consequences of Divorce
The Tax Consequences of Divorce
When you are in the process of getting a divorce, the last thing you want to worry about is your tax return. However, there are often significant tax consequences for both spouses after a divorce judgment comes through. Both you and your attorney should be familiar with the possible outcomes, so you are not saddled with an expensive surprise after the divorce is final.
Dependents, Child Support and Alimony
By far the biggest question for most couples is how to handle child and spousal support (also called alimony) in tax terms. Child support will differ somewhat from spousal support in that child support is not tax deductible, while spousal support (for those divorce before 2019) is. Conversely, child support is not included in taxable income for the spouse who receives it, while spousal support (for those divorce before 2019) is taxable.
Even if you cannot deduct child support, you may be able to claim your children as dependents. The IRS offers several child-related tax credits but is clear that only one parent may claim them in a given tax year. Usually, the custodial parent can claim the child tax credits, but sometimes the noncustodial parent may be able to if it is stipulated in the divorce decree, or if they pay half or more of the child’s support.
Property and Asset Transfers
The other major questions that come up in a tax context after divorce have to do with property division and assets. It is important to differentiate between value and basis, and understand that even if you receive more property, it may be a net loss due to capital gains tax.
Basis is defined in legal terms as the value assigned to an asset for purposes of sale or transfer. It takes into account the price in currency, but also any possible deductions you might take. For example, if you purchase an automobile for $40,000, and are able to claim $5,500 in deductions, the adjusted basis of the car is $34,500. If you later sell the car for $44,500, the net gain is $10,000, even though you paid $40,000 for the car. This is important because capital gains taxes are calculated on basis, not initial value, when it comes to most assets.
When an asset is sold at a profit, it is taxed under what is referred to as the capital gains tax law. You must pay capital gains tax on any profit you obtain that is over the amount of any exemptions you can claim. For example, you may claim $250,000 as a single person when you sell a home. If you received the marital home in your divorce, and it is worth $400,000, but you sell it for $600,000, you will pay capital gains tax on $350,000 (the sale price minus your exemption amount). At the current rate, that tax bill would equal $52,500. It is critical during a divorce that your attorney know how to negotiate terms which will be fair and not leave you with a tax bill you cannot pay.
Contact a Property Division Attorney
Divorce is intimidating enough without the specter of owing the IRS more money than you have. A skilled lawyer understands all aspects of divorce, including the financial, and will do right by you in negotiating a settlement that is both equitable and manageable. Contact a law office for an initial consultation today.