Divorce can be a difficult process, especially a contested divorce in which both parties cannot agree on major issues such as spousal support, division of marital assets, child custody and child support payments, if children are involved. But divorce can also affect the taxes you pay, and may even lead to bankruptcy depending on how assets and debts are allocated. That is why you may need the services of an experienced family law attorney to help you navigate through the future challenges you may face with respect to taxes and bankruptcy.
How Divorce May Affect Your Tax Liability
During a divorce, there are some major issues that can affect your tax liability, including:
- Division of Assets – If stocks were divided as part of the Marital Settlement Agreement, and one party wants to exercise their option on the stock, that party would be subject to capital gains taxes. This would also apply in the case of real estate, such as a marital home, or a vacation home, if the home’s valued exceeded the standard exclusion provided by the Internal Revenue Service (IRS).
- Child Custody – The IRS allows the custodial parent, defined as the parent who has the majority of physical and legal custody of a child, to claim that child as a deduction after a divorce. In some instances, parents may decide to share the dependency exemption, meaning that they alternate the exemption year after year, or one parent claims one child and the other parent claims a second child in cases in which multiple children are involved.
- Alimony – Any person that receives spousal support payments after a divorce must report those payments as taxable income. Furthermore, the person who pays spousal support can deduct these expenses, unless the Marital Settlement Agreement specifically prohibits this deduction.
- Child Support – Any parent receiving child support payments is not taxed for that money, but the parent paying child support cannot claim this payment as a deduction. Depending on which side of the aisle you’re on, you will have to factor this in to your yearly tax preparation.
Another important tax consideration to remember is that once a divorce is final, the divorced couple must file their returns as single taxpayers. However, a custodial parent may file as Head of Household, which means that they live apart from their spouse more than six months during the year, and pay more than half the costs of maintaining the household.
The Relationship Between Divorce and Bankruptcy
While divorce and bankruptcy may not seem to have a natural link, the truth is, divorce is one of the top causes of bankruptcy, and money problems are one of the top causes of divorce. As a result, some parties in a divorce may find that they must file bankruptcy directly after a divorce is finalized in order to regain control of their financial future.
One thing to keep in mind if you find yourself going through this process is that state law regarding what is exempt in the division of marital assets is often different from assets that are exempt in a bankruptcy case. Therefore, property that you managed to keep in a divorce may be seized in a bankruptcy filing.
An Advocate to Help Through Challenging Times
With all the complexities and difficulties of divorce and how it can impact your tax situation and even a possible bankruptcy filing, it is vital that you hire an experienced family attorney such as The Law Office of Eric C. Cheshire, P.A. to help protect your rights. Please contact us at 561-295-3693 for a confidential consultation.