A divorce can affect almost every aspect of your life, from overall net worth to tax bills in the next fiscal year. Taxes and divorces are complex enough on their own, but together they create a headache best addressed as early and as fully as possible. The right tax considerations will ensure the true fairness of your divorce settlement. In California, here are some of the most common tax issues divorcing couples face:
Failing to File Taxes in the Most Economically Beneficial Way
Couples filing for divorce may have the option to file jointly, married but separate, or independently. Depending on the terms of the settlement, filing one way may provide a better tax outcome than filing another. When possible, couples should put aside their differences to lessen the burden of tax liability and maximize the return. Discussing the tax season during the divorce process will allow couples to explore the best filing potential and reconcile any differences ahead of time.
Claiming Dependents
When parents split, understanding how child custody will affect the upcoming tax season can prevent both parties from trying to claim dependents when filing. Only the guardian who has custody can claim children as dependents on the tax return, in general. However, both parents can agree to split the dependency exemption, so both can receive some tax relief in the upcoming tax year. Furthermore, child support is neither taxable nor tax includable.
Failing to Keep Detailed Financial Records
Messy financial information makes reconciling differences between spouses even more difficult. Keeping receipts, organizing assets into detailed portfolios, and maintaining payment information creates a record that makes dividing property and assets and determining tax liabilities and possible deductions easier. It can also minimize or eliminate the amount a couple would have to pay to involve a forensic accountant to settle differences during the divorce process.
Failing to Understand Taxable Income and Deductions Regarding Divorce Arrangements
Depending on income sources, assets, and alimony determinations, each spouse may have additional taxable income or deductions to consider if filing separately during the next tax season. For instance, the individual paying alimony can deduct that amount from his or her tax return, whereas the receiving spouse will have to pay taxes on the amount received. These little nuances in tax law can significantly affect the outcome of an individual’s tax liability. Considering potential tax outcomes early on can help both parties determine the best way to divide assets in a truly fair way.
Accusations of Tax Fraud
Tax fraud is a serious issue that could result in further legal for divorced couples. While innocent spouse relief may protect one party in some situations, failing to report taxable assets can haunt one or both individuals for years. Take the time to account for every asset, whether you are taking responsibility for it or not, and keep documentation regarding your legal responsibility on hand in case you need to answer questions.
Finding Professional Help for Tax Considerations in California Divorces
If you are going through a divorce, speak with a tax professional, accountant, or a family law attorney with a deep understanding of tax code regarding your situation. Depending on the terms of your settlement, your tax considerations may extend far beyond the time it takes to settle the terms of your divorce. Divorce property transfers are not subject to the same laws as gifted assets, and they are not considered individual gains or losses for tax purposes. Understanding the projected implications of your divorce on your tax situation can help you make informed decisions. A Boyd Law San Diego divorce attorney can help you better understand the legal process of a divorce and the financial implications that come along with it.
For more information about divorce and taxes in California, contact the team at the Boyd Law Firm today.
TAX ADVICE NOTICE: To ensure compliance with the requirements imposed by the United States Treasury and IRS, we inform you that any federal tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of: (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another person any transaction or matter addressed herein.
