Often one spouse knows very little about their tax situation. They have not been involved in the tax preparation process and do not even think about what effect taxes may have on their divorce settlement. There are some important considerations that each spouse needs to contemplate before arriving at a final settlement agreement.
Divorce Issues Requiring the Assistance of a Tax Professional
To determine the tax implications of a divorce, a tax professional should have at least three years of tax returns and accompanying documents. Ascertaining the tax implications is fairly easy if both spouses are employed as W-2 income earners. When there is a family-owned business or professional corporation, the analysis can become more complicated. One of the advantages of the Collaborative Divorce process is that a member of the collaborative team can be a neutral financial professional. Their role is to help each side to understand the tax implications of their divorce, such as:
- Should the spouses file jointly or separately? (If the divorce is final before December 31 of the year, the spouses cannot file jointly.) A CPA will recommend whether the spouses should wait to finalize the divorce so they can file jointly, or to go ahead and finalize the divorce and file separately.
- When filing separately, which parent takes deductions related to the children? Can these deductions be shared between the parents?
- Who gets the tax credits/deductions for property taxes that have been paid, or other items if the parties are going to continue to own property together post-divorce? Can these credits/deductions be shared between them?
- Making sure each party understands the tax consequences of their asset division.
Planning for the Post Divorce Tax Life
When the divorce is final, that does not end the discussion of taxes. During the Collaborative Divorce process the financial neutral will have addressed some of these important considerations:
- Who can file as head of household?
- Which parent can claim the children as dependents, including adult children who are in college?
- Updating and correcting exemptions as shown on the paystub or W-2, so that when circumstances change due to the divorce, neither person is saddled with extra taxes when the next tax filing after the divorce arises.
- The person paying child support and/or spousal maintenance can no longer deduct this amount from their taxes.
- The person receiving child support and/or spousal maintenance does not claim that amount as income on their tax return.
For assistance with understanding the advantages of Collaborative Divorce and the role of a neutral financial professional, or divorce and taxes, contact us at Bruckner Hernandez Legal Solutions to schedule a consultation appointment.