If you're about to start divorce proceedings, you probably have a lot on your mind. Everything from alimony to child custody seem far more important than anything else you could think about. But when it comes to saying 'I don't,' there is one thing you should consider even though you may not believe it's a top priority at the moment.
The thing every couple should consider when going through divorce is their taxes. That's because divorce can play a major role when filing a tax return. If individuals aren't aware of the impact now, they may not be able to prevent negative consequences later on. Let's take a look at the major aspects of divorce worth talking to a family law attorney about because of how they affect taxes.
Filing status. Your filing status is perhaps the most obvious thing that will change when you divorce. Understand, though, that when you file a tax return, the date your divorce was finalized will determine whether you can file separately or not. In addition, it may be more beneficial to hold off finalizing a divorce for tax purposes because filing jointly can lower a divorced couple's tax obligation in some cases.
Spousal support payments. Also referred to as alimony, spousal support payments will factor into a tax filing, but not for the spouse making payments. Only the recipient spouse will need to claim the payments on their taxes as part of their gross income. The paying spouse may not claim alimony as an exemption.
Health insurance coverage. Because of the current state of the health care law, every individual must have qualifying health care coverage or risk a penalty on their taxes. If divorce would cause a spouse to lose health insurance, that individual must either find replacement coverage on their own or negotiate for continued coverage under their ex-spouse's plan.
Selling the marital home. In some cases, divorcing couples will sell the marital home for various reasons. But doing so can have tax implications in high-asset situations or in cases where spouses end up filing separately.
On the other hand, keeping the family home and transferring the deed into the name of just one spouse can have its own tax implications. That's because the legal fees incurred during this process may be filed as a deduction on an individual's tax filing, explains the IRS, which could be a major benefit for one spouse over the other.
Property division. In most cases, the transfer of property between spouses in a divorce has little effect on taxes; but in some cases, it can. Some property, like stocks, may require an individual to report capital gains on their taxes if they sell the property later on. In other situations, a spouse may even need to file a gift tax return.
Dependent exemption. For divorcing parents, careful considerations are taken when determining child custody because the best interests of the child tend to outweigh the needs of the parents. But when it comes to taxes, parents may want to consider the dependent tax exemption when making a custody arrangement.
Joint custody does not mean both spouses can claim the child as their dependent on their separate filings. Furthermore, the dependent exemption could be more beneficial for one parent over the other, which is something to consider during custody negotiations.