Key Tax Considerations When Going Through A Divorce
Below are some key tax issues that should not be overlooked when going through a divorce:
Special consideration should be taken when determining the filing status and claiming of dependents. If your divorce is finalized before December 31, you can no longer file jointly for that year. There could be significant tax savings filing jointly depending on the facts and circumstances. It is important to note that both spouses are responsible for the tax, interest, and penalties when filing jointly.
Generally, there are no tax consequences for transferring assets between spouses. There are exceptions and specific rules on the timing of the transfers for them to be nontaxable. Most transfers qualify if they are made within one year after the divorce or even up to six years after the divorce is finalized if the transfer is pursuant to the divorce agreement.
The 2017 Tax Cuts and Jobs Act changed the treatment of alimony. For divorces finalized after December 31, 2018, alimony paid is no longer deductible to the payor and is not taxable to the recipient.
A QDRO (Qualified Domestic Relations Order) is required when a spouse transfers part of their qualified retirement/pension plan as part of the divorce agreement. The receiving spouse can roll-over the funds to their plan tax-free. When it comes to IRAs, the timing of the transfer is critical to ensure it is tax-free.
Proper planning can reduce taxes due to the capital gain if ownership and use tests are met to qualify for the exclusion. Understanding the exclusion qualifications is critical to ensure the proper language is included in the divorce agreement. Click on the following link for a more detailed discussion of tax issues to be addressed when selling a house after a divorce: https://gallerosrobinson.com/insight-inside/tax-issues-when-selling-a-house-after-a-divorce/
The above list highlights some of the tax considerations but definitely not all. Tax rules are complex, so special care should be taken throughout the divorce process to ensure proper planning and documentation.
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The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.