When going through a divorce or separation, your mind may be preoccupied with thoughts over things such as property division, parental rights and responsibilities, and balancing your emotions while finding a way to move forward. One thing you likely aren’t thinking about, however, are possible tax risks associated with your divorce. Finding a family law attorney skilled in tax law is imperative to ensuring a fair settlement.
The Importance of Discussing Taxes Before Beginning Divorce Proceedings
It can be difficult to find a divorce attorney who has expert knowledge regarding tax laws but working with one who does can make a substantial difference in your pocketbook, not just today, but far down the road. Poor planning can lead to costly and irreparable consequences.
Once a divorce is finalized, it can often be difficult, if not impossible, to make changes to certain settlements in regard to your taxes. Early timing is critical to ensure that you and your tax attorney have reviewed each marital asset individually to avoid unwanted outcomes and costs.
How Divorce Impacts Your Taxes
Dissolution of marriage brings about changes to more than just your lifestyle. It can mean a change to your tax filing status, what you can and can’t claim on your taxes, tax penalties for transfer of marital properties, and more.
Below is a breakdown of a few of the more common tax considerations to discuss with your divorce attorney. This is just a sampling of potential areas that may be impacted. Be sure to have a thorough discussion with your attorney to rule out any concerns.
Tax Filing Status
In year 1 of your divorce, you will no longer be able to file “Married Filing Jointly”. As an individual filing, tax benefits you may have reaped in the past may no longer be available to you and new, additional costs might be involved. This could be due to several reasons including:
- Loss of the dependency deduction
- Loss of home mortgage interest deduction
- Added tax consequences from asset liquidation
Dependency Deduction & Child Tax Credit
Typically, the custodial parent will be awarded the ability to claim a child(ren) as a dependent as well as claim the child tax credit, which is available to those under a certain income. This depends on custody arrangements. For example, in cases where both parents share custody, they may agree to alternate years. In other cases, parents may elect to alternate years, regardless of custody, with one spouse taking the award every other year.
Transfer of Marital Property
Divorcing spouses must evaluate all the liquid and non-liquid assets in a marital estate. Liquid assets are possessions that can easily be turned into cash (e.g. cash in hand, CDs, checking and savings accounts, stocks, etc.). Non-liquid assets cannot be quickly or easily converted into cash and may take months or even years to make this transition, along with possibly accruing a loss of investment (e.g. real estate, land, retirement accounts, business inventory, etc.).
While some assets can be transferred in a divorce tax and penalty-free with a certified divorce decree, others require a Qualified Domestic Relations Order. Additionally, many non-liquid assets have unavoidable tax and penalty consequences upon transfer. This area of divorce can be very complicated, so close, detailed attention is necessary to avoid being responsible for unwanted expenses.
Finding a Family Law Tax Attorney with Expert Tax Law Knowledge
Not all divorce attorneys are experienced with tax law and because of this, they may neglect to ensure that you are being protected from negative financial outcomes in your divorce settlement. Our qualified tax attorneys at The Law Office of David A. King, P.C. are here to provide you with expert guidance from the start.
With a focused history of addressing tax issues pertaining to divorce, we lead you through the process of uncovering all potential concerns to find an equitable resolution. Schedule a consultation with us today to see how we can work with you.