Tax issues in a divorce are complicated. Make the wrong move during the negotiation process, and you could end up paying far more in the next tax season than you expected. To save yourself a massive headache, make sure you are prepared.
When Dividing Property, Take Advantage of Tax-Free Transactions
Certain property transactions pursuant to divorce proceedings are considered tax-free transactions. For instance, if one spouse buys out the other spouse’s interest in the house, no capital gains taxes are assessed. In contrast, capital gains are assessed if one spouse cannot buy-out the other spouse's interest, and thus, the property must be sold.
There are also special financial instruments you can utilize to preserve your retirement account tax-free, with some conditions. With this in mind, plan accordingly.
Determine Who Gets the Tax Exemption for Dependents
Generally speaking, it is the parent with primary custody of the child/children who is allowed to claim them as a dependent on their tax return. However, it is possible to split the dependency exemption with your ex-spouse if you both agree ahead of time. If you have no such agreement, and you both try to claim your child/children as dependents, you may get in trouble with the IRS.
Know the Current Tax Laws for Giving or Receiving Child Support or Alimony
Before 2018, federal tax law allowed ex-spouses who paid alimony to claim that expense as a tax deduction. Now, alimony is no longer federally tax-deductible, though you can still deduct alimony from your California state taxes. If you receive alimony, it works out in your favor because you will not have to pay income tax at any level.
Child support payments are not, and have never been, taxable as income; they are also not, and have never been, deductible—this is true both for federal tax law and the State of California.
Consult a Professional to Assess Your Tax Situation in Your Divorce
In addition to a great tax professional, you need a knowledgeable Family Law attorney to help you negotiate a divorce settlement that is best for your tax situation. Contact Park Family Law. Whether you need an experienced mediator to amicably and efficiently settle your case or an aggressive litigator to get you the best results in court, Park Family Law can assist you every step of the way.