Of all the areas of your life to consider when you are getting a divorce, your taxes probably aren't the highest-ranking item on your list. Your kids, your home, your other property, the impact on your family, and the impact on your work are all probably more important to you than whatever unexpected tax implications you may encounter during your divorce. However, there are tax ramifications when it comes to getting divorced that you should be aware of. You can place these issues in whatever area of hierarchy that you would like but you should keep them in mind no matter how important or unimportant they may be.
Taxes are one of those subjects that doesn't get much attention until the time comes to prepare and pay the government. We can look at those payments from the perspective of a person who does their best, to be honest, and think through the important issues but still may have some issues making sure that they are paying the correct amount. Whether you pay another person to help you prepare your taxes or go through the effort to do your taxes yourself it is not a fun practice to engage in. However, it is necessary, and making mistakes can cost you.
Depending upon how long you and your spouse have been married you may have gotten into a nice routine as far as what you end up paying in taxes each year. Texas does not have a state income tax so that is one thing that you don’t have to spend much time thinking about. On top of that, if your incomes are steady then your tax returns probably look similar from year to year. With there being a million different programs, software, and websites to use for tax preparation purposes there are almost limitless options available to you as far as getting your taxes done each year. It isn't the same as when we saw our parents sit at the kitchen table and try to complete everything by the deadline with zero help.
With that said, however, the attorneys at the Law Office of Bryan Fagan are here to help you keep track of all the issues related to your divorce- not just the ones that immediately catch your attention. We know that there are subjects that are more important to you when you begin a divorce. We also know that when you come into our office for a free-of-charge consultation that taxes probably won't be at the front of your mind. Be that as it may, we want to say a few words with you today about taxes and the tax implications of getting divorced. We don't expect to have you on the edge of your seat as you read through this blog, but I can tell you that taxes are not something you want to make a mistake on, if possible. The government knows how much you must pay but they still expect you to do the work to figure it all out. Nice system, huh?
After this blog post, if you have any questions, please do not hesitate to contact the Law Office of Bryan Fagan. We offer free-of-charge consultations six days a week in person, over the phone, and via video. Whether it's taxes that you want to discuss or another subject altogether, we want to help you understand what a divorce in Texas means for you and your family. We know that your questions are unique and that your family is the most important thing to you. Therefore, we give unique information to our potential clients in consultations just like we give unique advice to our clients once you sign up with our office for representation.
The beauty of a free-of-charge consultation is that it's not going to be a waste of your time. Many family law attorneys in Houston will charge you to come to talk to them. Not the Law Office of Bryan Fagan. We want you to understand that it's your time that's valuable. We want to deliver information after answering your questions most concisely and practically possible. If after that conversation you would like to talk to us about hiring our office to represent you in a divorce or another family matter, we would be honored. To start with, though, we just want to provide you with some information that may be able to help you begin your journey toward clarity in an unclear arena like Texas family law.
Pick up the phone or jump onto our website at bryanfagan.com. We can schedule a consultation for you on the way home from work, on your lunch break, or on the weekend. Whatever time or location suits you best is what we are going to work with you on. Serving our community is what we aim to do with each consultation, and we want you to understand that this is what separates us from the other family attorneys in Houston. Come see for yourself why thousands of our neighbors here in Houston and southeast Texas have come to expect the best in service and the most reliability in advice by hiring our attorneys to assist in their family law cases.
Where to start when thinking about taxes in divorce
If you are just starting your journey towards a divorce, then you probably have many questions about divorce in general and taxes specifically. Reading a blog post like this is a great place to begin acquiring knowledge. The general information that we provide you with here should get you to start asking yourself questions if nothing else and that can put you on the path towards building your knowledge up and becoming more comfortable and more confident in ultimately pursuing a divorce. Here are some basic insights into taxes and divorce that you may not be aware of but are important, nonetheless.
The personal issues that come up in a divorce are all over the place. On a certain level, all the issues of divorce are personal. This is not a bankruptcy, personal injury, or business law case. A divorce is the most personal of any type of legal case that I can think of. Your family issues, relationships, children, and even your small business are all a part of your divorce. However, taxes are something that is still going to play a role in your life moving forward and a transition point for your finances occurs during a divorce. You will want to ensure that you don't have to pay more than you need to in taxes but that you pay everything necessary. Threading that needle is where a tax professional can help and some good planning on your part. Here is what you can do to help prepare yourself from a tax perspective as you engage in your divorce case.
One of the major issues that come up in a divorce is spousal maintenance- more commonly referred to as alimony. These are payments made from one spouse to another after the divorce has come to an end. Spousal maintenance can be awarded in situations where one spouse provides sufficient evidence to a judge that he or she is unable to meet their minimum basic needs given their income, separate property, and whatever share of the community estate is awarded to them. In a situation like that you can request and be paid spousal maintenance so long as you and your spouse have been married for at least ten years. Here is how spousal maintenance and taxes interact with each other.
If you are going to be the spouse who pays spousal maintenance to an ex-spouse after your divorce has come to an end you need to know that you cannot deduct those payments from your taxes. As of January 1, 2018, the ability for you to write off those payments on your taxes came to an end. This used to be a way for the paying spouse to get a little of the burden off their shoulders when it came to the financial weight of managing the responsibility to pay spousal maintenance. However, the ability to just deduct whatever you had to pay in spousal maintenance off your taxes as not being income is no longer possible.
On the flip side, if you are the spouse who will be receiving spousal maintenance then you need to know that you do not need to include spousal maintenance payments as part of your gross income when you file your taxes moving forward. This is a benefit for those of you who expect to receive spousal maintenance payments as a result of your divorce. You get to have your cake and eat it too due to your being able to receive the benefit of getting this money to spend but not having to pay taxes on it in the same way as you would earn income.
Child support is a little like spousal maintenance in that one spouse will pay the other a certain sum of money for a certain period. Child support is calculated in a variety of ways, but the Texas guideline levels of child support can be found in the Texas Family Code. Your net monthly income would be calculated and multiplied against a percentage based on how many children you have before the court in this divorce case. At most, you can be ordered to pay 50% of your net income and the percentages start at 20% of your net monthly income if you have one child before the court.
However, you and your spouse can agree to a different calculation or method of determining child support based on your situation and thoughts. For instance, if you and your spouse are going to share custody of your children 50/50 then it may not make sense for you to pay child support in the guideline amounts. Rather, you and your spouse may decide to have child support paid based only on the difference in your salary and your spouse's. For example, 20% of the $20,000 per year difference in salary could be paid in child support rather than 20% of your entire net monthly income. Because you see your child a lot more than parents who have a standard possession order then you already pay for a lot of your child's monthly expenses.
If you are the parent who pays the child support, then you cannot deduct those payments from their taxes. This makes sense since neither can you deduct your spousal maintenance payments from your taxes as we just saw. You should consider this when you are negotiating your child support figures. I have worked with people who have assumed that child support could be deducted from their taxes each year and that was a main part of how they negotiated child support during their divorce. While this may be discussed during the divorce it is not always. When you are negotiating child support informally or in mediation there is so much going on that the tax questions may not be at the front of anyone's mind. However, now that we are talking about this subject here on our blog it will hopefully be something that you can think through now that you are approaching your divorce.
Selling your home is something that may be agreed to by you and your spouse or it may be something that you are ordered to do by the judge. It is a decision that is emotionally tough because you and your family have many memories built up within those four walls. Seeing kids walk for the first time, opening gifts on Christmas morning and all those family meals together are going to be impossible to forget. For that reason, there is something special about selling a house that from an emotional standpoint you may not be ready for. It takes a lot of planning and a lot of self-reflection to prepare yourself to sell a house or even to leave a house during the divorce to find a new place to live.
If your house is sold as a result of the divorce you do not have to pay taxes on the gain that you made (equity) in the home unless that amount is greater than $500,000. While this can occur depending on the market or area that you are living in, it may not be an issue for you right now but depending on what the housing market does and when you get a divorce that $500,000 figure may be within reach. In that event, you would need to pay taxes on the amount of profit made in selling the home.
Here is what you need to keep in mind, however. If you and your spouse have not used the home as your primary residence in at least two of the past five years, then no matter if you sell the home and make at least $500,000 you would still need to pay taxes on the profit made in selling the house. You should talk with your attorney about how to phrase things in your final decree of divorce if you or your spouse are going to remain in the home while the other spouse moves out. Be careful about having this conversation so that you can retain any potential ability to not pay taxes on the sale of the home in the future.
Pension benefits are another area that needs to be looked at closely when it comes to a divorce. Dividing up retirement benefits in a divorce is typically done with a qualified domestic relations order. For example, if you are the spouse who is asking for a portion of your husband's pension plan then a qualified domestic relations order could be drafted to facilitate the transfer of benefits from him to you and the divorce. This is done in order not only to facilitate a division of the retirement benefits but also to make sure that taxes don't come due because of a division of the plan. You will need to work closely with your attorney and your spouse's attorney so that there are no tax implications because of dividing up a pension plan.
Last, if business interests are transferred from you to your spouse in connection with your divorce, then you should make sure that interests in businesses are accounted for properly when it comes to your taxes. If your business is planning to carry forward losses into future years instead of being deducted in the year where they are incurred, then this may be lost if you are trying to transfer that business interest and the divorce. The same could be true if a partnership interest is transferred regarding partnership debt, built-in gains, and various types of operating accounts.
Questions about the material contained in today's blog post? Contact the Law Office of Bryan Fagan
if you have any questions about the material contained in today's blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free-of-charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law as well as How your family's circumstances may be impacted by the filing of a divorce or child custody case.