Divorce can be devastating and a hard blow to accept, as life changes drastically. You can divorce multiple times in a lifetime, but you can never “divorce” Uncle Sam. You have to therefore, pay attention to tax implications to as you split assets with your former spouse. Keeping an eye on financial changes and how they may affect your stakes can guard you from risky confrontations with the IRS.
Are You Single or Married?
The IRS would be interested to know your marital status when filing tax returns; either single, married, or divorced. If the divorce is not settled by the end of the year, you may still be considered as married and you can claim tax deductions by showing your household expenses. Example; if you pay 50% of the household expenses lived separately from spouse for 6 months of the tax year and if you have a dependent child that has stayed with you for over six months, you are eligible for some deductions.
Children-Related Tax Exemptions
Children-related deductions can contribute to huge tax savings, but it depends on the person who has custody. In case a child has stayed with you for a period of more than half a year, you are eligible for tax exemptions, with a current write-off set at 3,700 USD per child. Cash in form of alimony is considered to be valid for tax exemption for the person who is making the payment and treated as income for the recipient. Child support is not liable for deduction or as an income for the recipient.
IRAs are important settlements during any divorce, the spouse may get the entitlements to part of the other spouse’s IRA plans or employer sponsored IRAs. For the 401(k) or other employer sponsored plan, the benefits may be shared from a spouse’s plan and help save from potential taxes. Alternatively, rolling of 401(k) IRAs into your own IRA may be possible and the best way to evade paying taxes on them. It must be pointed out that making early withdrawals from retirement plans will attract IRS taxes and penalties.
Any property that changes hands during a divorce settlement is not considered as a capital gain or loss, and therefore, taxes are also not levied on property transfers. However, in the event that the recipient wants to sell the property, then taxes will eventually set in. Such property transfers are valid only if they are completed within a year of legal termination of marriage.
The divorcees are liable to tax return on the income of the other spouses (however this is not the rule in community property states such as Arizona, Texas and Wisconsin). In these states, you will be considered to have earned from the income of the former spouse during the year of divorce.
Divorce can complicate your lifestyle and almost all aspects of your life, including taxes. Whichever decision you make during this process, don’t forget to think about the tax consequences. Visit the IRS website or talk to a tax pro if you are unsure on how you will be affected by a divorce.