A tricky part of divorce that I find many people in need of answers regarding is taxes and how they relate to divorce. Many of us rely on accountants or other tax professionals to “do our taxes” for us each year. This is especially true if we own our own business or have other reasons why our taxes are more difficult to complete on our own. Regardless of the reason for doing so, if we choose to have someone else do our taxes for us we are losing out on an opportunity to learn about an important area of our adult lives.
I’m not here to try to encourage you to start thinking of your taxes as something fun or exciting. That would be disingenuous and probably a waste of my time. Rather, I am here to point out to you why taxes are important to you as a person going through divorce as well as what you can do to make sure that your divorce doesn’t cause you to completely lose track of what you should be doing each year in regard to your taxes. Remember that you are responsible for filing a tax return each year- regardless of how much your personal life has changed.
During the course of your divorce you will come face to face with a fairly wide range of issues regarding taxes. As a result, it is critical that you be able to take a look at those issues with an eye for detail. Your attorney should be someone familiar with taxes and tax related issues but is not going to be qualified (most likely) to give you advice about your taxes. Before you begin the final negotiations for your divorce it may be worth your while to spend some time (and money) speaking to a tax professional about the decisions you are considering. That person’s advice could cause you to give your decisions some second thought- for better or worse.
The worst thing you can do is not talk to someone with experience and expertise in taxes until after your divorce and then find out that you made some serious mistakes in the negotiation of your divorce settlement. Having to take care of tax related problems within your divorce decree after your divorce can take a long time and can cost you a lot of money. Do yourself a favor and collect as much information when it comes to taxes before the conclusion of your divorce case.
Most attorneys will tell you in your engagement contract that they are not tax professionals. The Law Office of Bryan Fagan is one of those law practices that will tell you in no uncertain terms that we are not here to provide you with formal tax advice. That is not to say that you cannot ask us or any other family law attorney questions about taxes. What it does mean is that we are not the ultimate authority on your taxes. There are many people out there who are better suited to give you advice and perspective based on your specific circumstances.
With all of that said, here is some information on the most common areas related to taxes that may come up in your Texas divorce. You can begin to have a discussion about these topics with your family law attorney but you are best served by contacting a tax professional when having a wide ranging and specific conversation about the issues that are detailed below.
What about tax return filings in specific years during your marriage?
The final document of every divorce in Texas is known as a final decree of divorce. This document contains all of the agreements/court orders that were arrived at during your divorce. What happens is one of the attorneys (yours or your spouse’s) will take the agreements/court orders and turn them into a final decree of divorce that you and your spouse will have to live by and turn those into a final document that everyone including the judge will have to sign.
What does this document have to do with your tax responsibilities after the divorce has finally drawn to a close? In most divorces, what ends up happening is that for each year of your marriage both you and your spouse will be entitled to one half each of any refund that is or has been received. Depending on your individual circumstances, however, this may not work well for you and your spouse.
Sometimes you may not even be aware whether or not you and your spouse even filed income taxes for each year of your marriage. Many times in a marriage one spouse will handle all the financial questions and the other will basically stay out of the way. This can seem to work ok but if you are the spouse who has never filed the taxes you are at a disadvantage in at least two areas. Number one, you don’t possess the knowledge that your spouse does in relation to taxes and how to file them. Number two, you are putting yourself in a bad position because you are totally relying your spouse to fulfill your duty to file your income tax return each year.
Do you owe taxes for any year that you were married? Were you and your spouse audited by the IRS in any year during the course of your marriage? One thing that I suggest to clients that they do early in their divorce is to request copies of their tax returns at least for the past 5-7 years. This will give you, your lawyer and your tax professional the starting point that you need to analyze what sort of position you are in as far as taxes are concerned.
Sometimes your spouse may own a business that you have had very little direct contact with over the years. All you know is that your spouse handles all the financial “stuff” and that the money earned from that business goes towards providing you and your family with food, lights, water and retirement savings. Otherwise you have been hands off when it comes to the business. Is that a good or a bad thing?
Depending upon how detail oriented your spouse is, this can be either a good or bad thing. The IRS may view you and your spouse are being more deserving of an audit due to the nature of your business. Sometimes the end result of an audit is that you are made to pay money in taxes for returns not properly filed years ago. If this could be your situation, then talk to your lawyer and tax professional., It may not be in your best interests to accept a settlement offer where you “only” get half of any future tax returns where you and your spouse file jointly as married persons.
How do you handle filing your taxes in the year of your divorce?
Say that you and your spouse are getting divorced this year in 2020. This is the official year that you and your spouse are getting divorced and as a result you will file separate tax returns since the filing status for any given year is determined on December 31st of any given year. So, you could be married for 364 days in 2020, but if you are divorced on New Year’s Eve then you would be considered divorced for the entirety of 2020.
There are two options that you can choose to take advantage of when it come to taxes as residents of the State of Texas. Option number one is that you can split the income for that year and file as if you were single for 2020. You could claim your own income and withholding and deductions, all to the exclusion of your spouse in regard to those same concepts. Option number two would be go back and look to see what months of 2020 you actually were legally married to your spouse. For those months you could claim one half of your spouse’s income, deductions and withholdings, and your spouse would do the same for you.
From my experience partitioning your income for 2020 would be the easiest and most straightforward method to employ especially if you are looking to come into contact the least amount possible with your ex-spouse. If this option is not in your best interests financially I would again suggest that you contact a tax professional to determine what your best course of action may be. Whatever option you choose to take advantage of should be noted in your divorce decree.
If you do not specify in your final decree of divorce as what plan you choose to employ then the IRS will select option two for you and your spouse. You may not be able to itemize your deductions based on your income so you should find out whether you would benefit from taking part of these deductions for this period of time. You should have all of this knowledge in place before beginning settlement negotiations. As always, anything that you agree to in relation to your taxes should be spelled out in your final decree of divorce.
What about deductions related to your kids?
You as a parent can claim head of household for your children based upon the number of nights that the kids have been in your possession throughout the year. Basically, the parent who becomes the primary conservator of your children and who can determine the primary residence of those kids will be able to claim deductions and exemptions at tax time.
This means that you will need to bear this in mind as you negotiate final orders in your divorce. It rarely comes down to this specific issue, but if taxes are a big time issue for you in the divorce and you believe that you need to push for primary custody as a result then you need to do so. You cannot side step this issue or attempt to negotiate around it. If you are not the primary conservator of your children then you will not be able to claim head of household status or any deductions/exemptions.
Do your retirement savings impact taxes in regard to divorce?
If you come into your divorce with little in the way of liquid cash, then you may feel tempted to draw early on your retirement savings in order to fund your divorce. If those retirement funds are in an IRA or 401(k) then you and your spouse would be subject to taxes and penalties associated with withdrawing funds early from a retirement account. If you have done so prior to settlement negotiations in your divorce you should figure out the extent of the damage, so to speak, and then come prepared to negotiate with that figure in mind.
How will the tax bill be paid? Who will have to claim this income on their tax return? You can be awarded all or a portion of your spouse’s retirement plan in the divorce. If you are given such an award you can decide to liquidate that money without a penalty but will have to pay taxes on that amount of money. This can be a great thing to take advantage of if you have to pay debts associated with your divorce. Talk to your financial advisor to see if this is a good option for you to consider.
Questions about divorce? Contact the Law Office of Bryan Fagan
I realize that we have spent a majority of today’s blog post discussing financial issues and taxes, but I will again point out that our office is not equipped to provide you with formal tax or financial advice. However, if you need advice regarding family law issues and divorce then please do not hesitate to contact the Law Office of Bryan Fagan. We will work with you and counsel you on the legal issues associated with divorce as well as the financial implications of getting divorced. You should always consult with tax professionals on specific tax questions but our office is equipped to help you sort through all of the issues surrounding divorce.
A free of charge consultation with one of our licensed family law attorneys is only a phone call away. Thank you for your time and consideration.