The decision to marry often inspires numerous financial benefits. Combining the income of two individuals to support one dwelling unit can lead to a more comfortable standard of living. Spouses can save together for retirement or combine their income to qualify for a bigger mortgage.
When people file for divorce, there are financial implications for that change as well. The end of a marriage usually means that people must divide their marital property. In some cases, there may be support obligations even after the divorce. On top of everything else, there could be tax implications.
How do divorce proceedings tend to affect someone’s tax responsibilities?
They can file as the head of a household
There are some benefits to divorcing, including the ability of both spouses to file as the head of their own households. Each individual can potentially maximize their credits and exemptions by filing as someone with their own household. However, doing so is only an option after the completion of a divorce. People have to file joint returns for the year in which the courts grant their divorce in most cases.
Selling assets could lead to capital gains taxes
In many cases, financial transactions conducted as part of a divorce are exempt from special taxes and penalties. For example, people can divide a retirement account while avoiding the taxes and penalties usually assessed for an early withdrawal. The same is true for major transactions, like selling the marital home or a family business. However, if one spouse retains marital property and then sells it after the divorce, they may be subject to significant capital gains taxes.
One spouse can claim the children
If there are minor children, then the custody arrangement typically needs to include specific rules for annual income tax filings. Only one parent can claim their children on their tax return each year. That parent may be the same parent every year in some cases or may alternate if the parents agree that would be the most appropriate solution.
There are no longer tax breaks for alimony
Not that many years ago, the party paying alimony could report that obligation on their income tax return as a way to diminish what they had to pay. However, that practice ended several years ago.
Depending on the assets someone owns, the size of their family and the source of their income, a divorce could potentially result in major implications for their income tax obligations. Ultimately, earning about tax-related challenges may help people secure a better outcome to financial negotiations during divorce proceedings.