Getting Divorced in Utah: How Will My Taxes Be Affected?
Like everything that has to do with the IRS, this is a HUGE topic, but it can be tackled. Every circumstance is different and consulting with an accountant/CPA might help with the nitty gritty details, but this can at least get you started and identify areas that need to be considered.
Filing status change: The date that your divorce decree becomes final matters. The year that your divorce becomes final is the year that you start filing separate tax returns. For example, if your decree is signed December 31, 2014, then you will file separately for 2014 even though you were married for all but the last day of the year. In most divorce cases, that means dad is now a single filer and mom, who has the kids, files as head of household, which provides a greater standard deduction amount. But make sure you really meet head of household requirements, you must have had a dependent living with you for more than half the year and you had to pay for more than half of the upkeep of your home.
Child Exemptions and Credits: The custodial parent, the parent who a child spends most of the year with, can continue to claim a child as a dependent. Only one parent can claim a child. If the custodial parent consents, they can sign a waiver and allow the non-custodial parent to claim child. Also, if there is more than one child, the parents can agree to split the exemptions and let one claim one child and the other parent another.
The dependency issue will also affect the various child-related tax breaks, such as the child tax credit, the child and dependent care credit and various education tax breaks. Generally, the parent who claims the child as a dependent also gets the credits, but it would be wise to check out your specific situation at filing time.
Housing concerns: When a couple splits, they often have to deal with disposal of the house they shared. Often the spouse who has primary care of the children keeps the house. But be aware that when it comes time to sell, you won’t be able to shelter as much from the tax collector. A single seller only gets a $250,000 profit exemption from capital gains. So couples might want to sell the house before the divorce is final so they can protect up to $500,000 in gains from the IRS.
There are more rules that dictate what you can protect from the IRS when you sell your home. This is another good place to consult an accountant.
Alimony and Child Support: Alimony usually is taxable income to the ex who receives it. But the spouse making the payment gets to deduct it. And child support is neither taxable income nor a deductible expense.
Retirement Assets: Be careful. If you cash out a 401(k) in order to give your ex-spouse money, the IRS still considers that a taxable distribution, and you will be the one paying the taxes. Check into a Qualified Domestic Relations Order (QDRO), which gets the money to your ex-spouse without the tax burden. IRAs function differently and don’t need a QDRO, but the transfer need to be spelled out in the final divorce decree.
Asset Transfers: In a divorce, when property shifts from one spouse to the other, the recipient does not pay taxes. However, the property’s tax basis shifts. Basically, you could end up paying substantial capital gains when you sell it. In other words, a $50,000 bank account is worth more than a $50,000 dollar stock portfolio that has a basis of $25,000. The first is not taxed, the second will be taxed on the $25,000 increase in value.
As scary as the actual IRS tax code can be here is a link so that you can peruse some of the issues in greater depth. It is long but readable and may spark questions about issues I haven’t touched on here.
Good luck in your search for answers. I hope this is helpful.
If you find yourself needing assistance buying or selling a home, my team can help you.
Call Chris: 435-313-3966
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**I am not an attorney and am in no way trying to give legal advice or practice law. The information on this website is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem.