Taxes and Divorce – What to Watch Out For
Nearly 60% of Americans hire someone to do their taxes for them each year. Needless to say, filing your taxes isn't exactly a cakewalk. Attempting to file your taxes while in the midst of a divorce can be even trickier due to the changing nature of your marital status. Many people do not even realize the implications a divorce can have on their tax filing status until the following tax season rolls around. When it comes to taxes and divorce, consulting a tax specialist or experienced divorce lawyer is important so that all your specific questions can be answered. Listed below are a few important tax topics to be aware of while working to obtain a divorce.
The Date of Dissolution (Filing Status)
Until now, checking the "Filing Status" box with a response of 'Married' or 'Single' has been quite simple. With a pending divorce decree in the court system, this question may now be more difficult to answer. According to Arizona law, if a couple is still legally married as of December 31st of that tax year, the couple may file jointly. If the divorce is finalized on or before December 31st, the couple will be considered divorced for the entire tax year and cannot file jointly.
Separated spouses who wish to claim Head of Household filing status (and receive a greater tax deduction) must meet the following criteria:
- You and your spouse must have lived apart during the last six months of the tax year
- Your and your spouse's dependent children must have lived with you for more than half the year
- You must have paid more than half of housing costs for the year.
If you feel you meet these requirements but have more questions, seek the help of a certified tax specialist.
Community Property Laws in Arizona
If your divorce is not yet finalized, but you and your spouse choose to file separate tax returns, you must list one half of the joint income as your own, regardless of which spouse earned the money. Community Property law in Arizona dictates that all income in your marriage is considered joint income until your marriage has been dissolved.
Tax Exemptions and Deductions
Tax exemptions for dependent children generally go to the primary custodian (or the parent with whom the child lived for more than half of the filing year). Spouses can also choose which parent will receive the exemption by filling out Form 8332 and agreeing to the exemption in writing. Keep in mind that as of 2013, having a dependent can reduce your taxable income by almost $4,000.
Spousal maintenance and child support payments are treated differently on your taxes. Spousal maintenance is tax deductible. It is considered income for the spouse receiving spousal maintenance and qualifies as a deduction for the spouse paying it. If you receive a large spousal maintenance payment, you will probably owe the IRS more in taxes at the end of the year. Keep this in mind when determining if you want spousal maintenance as part of the divorce settlement. Conversely, child support payments are not tax deductible, nor can they be considered a source of income for the recipient.
When divorce occurs later in life, the safety of your retirement fund becomes critical. A document called a Qualified Domestic Relations Order (QDRO) will be important to understand early on in the divorce as this can allow you to use the benefits from your spouse's 401(k) as your own. It will also divide the money you've saved equally between you and your spouse when you split.
If you gain property through a divorce settlement, such as the family house or other tangible assets, you will be taxed when you sell them based on the profits you have earned.
Consulting with a tax professional and having an experienced family law attorney like Brad Crider in your corner will minimize the difficulty of your tax-filing process so you can focus on the more important aspects during this difficult time of your life. The Arizona family law attorney offices of Brad Crider are particularly adept at the complex division of assets. Call Crider Law to set up an initial consultation with an attorney who will work for you to be free of devastating tax consequences once the divorce is through.