Going through a divorce impacts your life in a variety of ways. One of the overlooked ways that divorce impacts families is concerning taxes. Admittedly, this is one of the least interesting parts of a divorce. Understandably, many of us would overlook taxes when considering a divorce. However, the reality is that families just like yours are impacted by changing family dynamics because of a divorce. As such, your taxes may change because of the divorce.
In today’s blog post from the Law Office of Bryan Fagan, we will share information regarding taxes and divorce. When taken together, these are subjects that demand your attention. Although they may not be the most interesting or headline-grabbing grabbing taxes are still important. As a result, we want to spend some time walking you through the essentials of your divorce case and how they will interact with your taxes.
What matters when thinking about taxes and divorce?
There are a variety of subjects related to taxes that become relevant during a divorce. Your filing status on your taxes affects the deductions and credits you are eligible for on your federal tax return. If you happen to file using the wrong status on your taxes penalties may be assessed against you. This is true even if you make a mistake inadvertently. You must understand what the consequences are of your filing status and how a divorce may change that scenario.
For this reason, you must work with someone who understands the complexities of tax law as it pertains to divorce. A CPA, registered agent, or even a person who is a certified tax preparer can help you to maximize your position as far as taxes are concerned. There is nothing wrong with ensuring that you file your taxes in the most cost-effective way possible. This is responsible and prudent during and after a divorce. Working with an experienced family law attorney may also help you to learn more about different scenarios related to your taxes and how they may impact you moving forward.
How when you divorced during the year impacts how you file your taxes
If you are married as of December 31st of the given tax year you can file as married. You may also choose to file as a single individual depending upon your preference. Let’s walk through an overview of your potential filing statuses if you are still married as of December 31st of a given year.
Your first option is to file as married filing jointly. Under this status, your income for the year would be combined with your spouse’s income. Whatever expenses or deductions you can account for with your spouse are also added to your tax return. Filing jointly produces a better outcome as far as tax liability than married filing separately. The key is that you need to be married to your spouse as of December 31st of that tax year.
Married filing separately is another tax filing status that you may be able to avail yourself of during your divorce. In this situation, you and your spouse file your income tax returns as individuals. The benefit of married filing separately is that you would not have any responsibility for your spouse’s tax return. Whatever your spouse owes in taxes you would not be responsible for paying. You may have to pay more in taxes simply because by filing separately there may not be an opportunity to take advantage of the same deductions.
Filing as a single adult
You may only file as a single adult if your final decree of divorce is signed by the judge before December 31st of any given tax year. Your tax rate will be higher, and your standard deduction will be lower than a person who files as married.
Head of household
When you file as head of household you need to be divorced. Some technical requirements may allow you to file as head of household even if you are still married. First, you and your spouse must not have lived in the same home beginning on June 1st of the tax year and ending on December 31st of the tax year. Next, if you paid for more than 50% of the home upkeep on your marital residence. Finally, if your house was where your children resided for more than half of the year then you may file as head of household even if you are still married.
Filing as head of household allows you to enter a lower tax bracket. It is not always easy to determine whether you would be able to file as head of household. Your family law attorney can guide you in this regard. Working with an experienced tax preparer can also help determine what your options are when it comes to filing status.
How is spousal maintenance handled when it comes to taxes?
Ask yourself whether you are eligible to pay or receive spousal maintenance. Spousal maintenance may only be ordered by a judge. This means that you would need to go to a court and go through a trial. Does your spouse lack the ability to provide for their minimal, basic needs? On top of that, the paying spouse would need to have the financial wherewithal to afford payments. Being prepared to make an argument or a defense against fossil maintenance comes down to diligence and being goal-oriented.
Spousal maintenance is a major issue when it comes to taxes, as well. If you plan on paying spousal maintenance and a divorce those payments are no longer tax deductible. On the other hand, the spouse who receives spousal maintenance does not have to declare those payments as income on their tax return, either. A divorce that was concluded before 2019 may have a different result, however. The law changed at the beginning of 2019 so you should check with your attorney to verify these details.
Your children and your taxes
One of the most asked questions when it comes to divorce, and taxes is how your children are handled when it comes to filing each year. One relevant part of this question is that child support payments cannot be deducted by the non-custodial parent. Likewise, the custodial parent does not need to report those payments as income on their tax return, either. In a way, child support is treated the same as spousal maintenance.
Look to your final decree of divorce when it comes to how you should handle which parent can claim your children as dependents on their tax returns. Sometimes, parents in your position will decide to alternate years as far as claiming their children. Your spouse would be able to have the children act as dependents and even years, for example, and you would be able to do so in odd years. Or you all may determine that the custodial parent of your children can claim them on their tax return each year.
An interesting situation presents itself when you and your spouse are still going through your divorce. If you are not yet divorced and are filing your taxes separately then the IRS tells us that wherever the children live more during the year is the parent who may claim the children on their taxes as dependents. This is a more intricate question to ask and is one that you should consider bringing up to your experienced family law attorney or tax preparer.
The marital house and taxes
Let’s assume that you receive the marital home and the divorce. Whereas the house was formerly owned by you and your spouse it is now going to be your responsibility to pay the mortgage. By the same token, your name will appear on a new deed as the sole owner. In a situation like this, you would not need to pay any kind of taxes during that transfer. Talk with a real estate agent or other professional regarding the possibility of capital gains taxes on the appreciation of the home both before and after it is transferred to you in the divorce. Depending upon when you sell the home and the real estate market you may be owing capital gains taxes.
Retirement accounts and taxes
Receiving a portion of your spouse’s retirement account in the divorce is a good thing. This can set you up for success in life moving forward. This is especially true depending on your age in the amount of money you have saved up for your retirement. However, this good result in the divorce can become bad if not done correctly. You need to make sure that you and your attorney are planning this step in the process prudently.
A Qualified Domestic Relations Order (QDRO) will need to be drafted. This is the document that is drafted by your attorney and sent to your spouse’s employer. The domestic relations order will state the terms by which the retirement account is going to be divided. Typically, a domestic relations order is sent to a judge for signature at the same time as a final decree of divorce. Work with your attorney to make sure that your domestic relations order is sent to the judge for signature at the same time as your final decree of divorce.
One last note when it comes to retirement accounts is that many of them have tax implications when you begin to withdraw money. Additionally, there may be consideration for penalties if you are younger than 59.5 years of age when you take out a withdrawal. Taxes and penalties come along with withdrawing retirement funds either when you are under a certain age or if not done with the cooperation of a financial professional.
Working with an experienced family law attorney
When it comes to filing taxes, it is always best to have someone check your work. Even financial professionals have people who double-check them on important documents like their tax returns. When it comes to the legal process, having an experienced family law attorney helps you to save money. It can also allow you more time and energy to focus on other areas of your life. This includes pondering how to handle taxes for that year.
An attorney with the Law Office of Bryan Fagan also is familiar with the divorce process. We serve clients inside and outside the family courts of Texas each day of the week. As a result, we know how to act efficiently within your family law case. Rather than leaving your case to chance with a less experienced attorney, contact our office and allow us to put our experience up against any challenge you are facing.
Additionally, an attorney who handles divorce cases can help you carve out specific agreements within your Divorce decree associated with taxes. Depending upon changing tax laws you may be able to Take advantage of certain periods when it comes to listing your children as dependents. Again, an experienced family law attorney can help you access the situations that allow for favorable outcomes when it comes to your taxes.
Planning your finances after a divorce
A crucial part of planning your divorce case has to do with making sure your life after the divorce is viable from a financial perspective. The last thing you want to do is to walk out of a divorce and be unprepared financially. Rather, you want to have a specific goal in mind for your finances and a manageable plan to reach that goal. The time to start planning this begins now as you are either at the beginning or even in the middle of a divorce.
Creating a budget for your household is one of the most straightforward steps to take when it comes to financial planning. This does not have to be complicated. A household budget involves understanding your income and your expenses each month. You can start to go through your checking account or credit card statements to determine you’re spending. From there you may be able to reduce spending by eliminating optional costs. Remember that a divorce should be a time of austerity rather than free spending. Working on this tool assists you in making it through a divorce and the period after.
Finally, one of the steps that you may want to take during your divorce is to check your credit report. It is not that you may want to start borrowing money or taking out a loan for anything right now. Rather, your credit report will tell you the number of loans for lines of credit that you have open now. Unfortunately, some people in a divorce come to find out that their spouse has opened a credit card or other type of loan in their name. The time to do something about that is now rather than finding out about this after your case has come to an end.
Being proactive about taxes after your divorce
Many people enter a divorce without a plan of any kind. This is not a good idea. You should have an idea of how you want your divorce to look after the divorce comes to an end. The more thought out and developed your plans are the more likely they are to come to fruition. True enough, plans do change over time due to changing circumstances. There is no doubt about that. However, that doesn’t mean that you should not engage in detailed planning when possible.
Taxes are just part of the planning that you and your attorney can work on together. For instance, the attorneys with the Law Office of Bryan Fagan often sit down with our clients to listen to them about their thoughts and needs at various stages of the divorce process. We know that your perspective will change along with your circumstances during a case. When we sit down with you, we take the time to learn more about your thoughts and concerns about the divorce. Thank you for joining us today here on our blog. We post unique and informative content every day of the year.
Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan
The attorneys with the Law Office of Bryan Fagan 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. Before signing a document or negotiating on a subject you do not know well, contact our office. We look forward to the opportunity of serving you during an important part of your life. The Law Office of Bryan Fagan is on your side.
Evan Hochschild was raised in Houston, TX and graduated from Cypress Creek High School. He went on to graduate from Southwestern University in Georgetown, TX with an undergraduate degree in Political Science. While in college, Evan was a four-year letterman on the Cross Country team.
Following in the footsteps of his grandfather and uncle before him, Evan attended law school after he completed in his undergraduate studies. He graduated from St. Mary’s University School of Law and has practiced in a variety of areas in the law- including family law.
Mr. Hochschild is guided by principles which place the interests of clients first. Additionally, Evan seeks to provide information and support for his clients with the heart of a teacher.
Evan and his wife have four small children together. He enjoys afternoons out and about with his family, teaching Sunday school at his church and exercising. A veteran attorney of fourteen years, Mr. Hochschild excels in communicating complex ideas in family law simply and directly.
