Divorce can have significant implications for taxes, both during the divorce process and after it’s finalized. When it comes to divorce and taxes, failing to consider the tax consequences associated with divorce can result in unexpected bills or missed opportunities to save on taxes.
It’s always suggested that you consult with a tax professional and your trusted divorce attorney to understand your specific situation’s tax implications.
How Does Divorce Affect Taxes?
Divorcing couples have a lot to worry about, but one that might go under the radar is taxes. Since various tax implications are associated with child support, alimony, and property division, you need to explore how divorce and taxes will impact your financial situation positively or negatively.
Use the guide below to help guide your conversations with a tax professional or your Ohio divorce lawyer:
- Filing status: Your filing status for tax purposes will change after your divorce is finalized. If your divorce is finalized by December 31 of the tax year, you must file as either single or head of household for that year. If your divorce is still ongoing as of December 31, you may be able to file as married filing jointly or married filing separately. When it comes to divorce and tax filing, it all depends on your specific situation.
- Alimony: If you pay alimony, or spousal support, to your ex, you can typically deduct the amount from your taxable income. If you are the party in the divorce receiving alimony, you are forced to report it as taxable income on all your future tax returns.
- Child support: Unlike alimony, child support payments are not tax-deductible for the paying spouse and are not taxable income for the receiving spouse. This means that child support payments do not directly affect either party’s taxes.
- Unallocated support: In some cases, you and your ex-spouse may agree to pay “unallocated” support. This type of support combines child support and spousal support payments into a single payment. Unallocated support is tax-deductible for the paying spouse and taxable income for the receiving spouse. This type of support can have significant tax implications.
- Dependency Exemptions: Only one parent can claim a child as a dependent on their tax return. Most often, the parent with primary custody will claim the child as a dependent. However, parents may agree within the divorce process to alternate claiming the child as a dependent each year. The parent who claims the child as a dependent may be eligible for various tax credits, such as the child tax credit or the earned income tax credit.
- Property division: The transfer of property between spouses as part of a divorce is generally not a taxable event. However, if the transfer results in a gain or loss for either spouse, that gain or loss may be subject to capital gains tax.
- Retirement accounts: The division of retirement accounts, including 401(k)s and IRAs, may have tax implications throughout your divorce. A qualified domestic relations order (QDRO) is typically required to divide retirement accounts without incurring tax penalties.
Navigating divorce and taxes can be challenging. There are nuances in tax laws that can change based on your specific circumstances. Meeting with a qualified tax professional, or asking your divorce attorney for advice, will prevent you from making mistakes that could cost you when tax time rolls around. A divorce attorney’s job is to help prepare you for the life changes associated with divorce so that you can walk away confident and ready to start your new life.
Learn More About Taxes and Divorce From a Qualified Attorney in Ohio
When navigating the financial implications of your divorce, you need someone who understands the ins and outs of Ohio laws. Working with the Law Offices of Kenneth R. Kline LLC will provide you the peace of mind you need throughout the divorce process and as you work towards your new life. Contact us today for a consultation.