How to Deal With Divorce During Tax Season

How to Deal With Divorce During Tax Season

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( – Divorce rates might be falling, but they’re still pretty high in the United States. Every year, around 750,000 couples legally choose to end their marital union in this country. Divorce has a broad range of practical implications, but one factor that many people don’t automatically consider is taxation. If your marriage ends before tax season, there are certain actions you’ll need to take into account to protect your interests.

Let’s take a closer look.

Preserving the Marital Estate

Even if your marriage is coming to an end, that doesn’t mean your marital estate has to do the same. Keeping as many of your jointly held assets as possible in shared possession can have benefits in terms of your tax liability. Also, it can simplify matters for your children when the time comes to pass on your assets or when they need financial support for, say, higher education.

An End to Joint Filing

There are some benefits to paying taxes as a joint filer. Unfortunately, once you get divorced, you’re going to lose some of them.

First, you may not be entitled to the same deductions for your dependent children if you’re no longer residing with them. Equally, you’ll lose benefits related to your marital home if you move out of it or sell it.

If you’re liquidating a major asset upon divorce, such as your shared home, it makes sense to do so in such a way that you maximize the tax benefits associated with your new arrangement. Getting this right can be complicated, so hiring an expert to help is a good idea.

You could consider delaying the finalization of your divorce until after the next tax season to minimize your liability one last time.

Alimony Payments and Taxation

Traditionally, recipients paid taxes on alimony payments they received, and the party paying the alimony filed the expense as a tax deduction. Since the implementation of the Tax Cuts and Jobs Act of 2017, this rule is no longer the case for any divorces that have reached finalization from 2019 onward. The change is good news for parties in receipt of alimony payments and bad news for people paying.

Tax Implications of Asset Transfers

Not all assets are the same, at least not in their tax implications. If you’re transferring assets to your spouse (or vice versa) during a divorce settlement, you’ll need to be aware of any tax liability either of you may end up incurring. Movement of non-liquid assets, such as stock options, IRAs and life insurance annuities, can be particularly concerning.

If you’re going through a divorce and worried about tax or other financial implications, the best step to take is to hire an expert to assist you.

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