Though tax season has come and gone, there are a number of tax issues to be aware of when you are going through a divorce that could save you, or hurt you, if you are not careful. While you should always discuss your situation with a family law attorney (and possibly even an accountant), here are some major tax issues to consider when going through a divorce.
Determining Which Status to File
While your divorce is pending, one of the toughest decisions to make is choosing your filing status. Should you file a joint tax return with your soon-to-be ex-spouse or not? While filing a joint tax return may result in a decreased tax rate, there can be disadvantages. For example, if you file jointly, both you and your spouse will be jointly and severally liable for all taxes owed to the IRS. This means that if your soon-to-be ex fails to pay his or her portion of the taxes, the IRS can force you to pay for all of it. Additionally, if your spouse individually owes any state or federal taxes, your joint tax return can be used to satisfy their tax debt.
If you are concerned about these issues, then prior to filing a joint tax return, consider signing an agreement with your spouse on how tax liabilities and refunds will be handled. However, even if you execute such an agreement, the IRS can still come after you for unpaid taxes, interest and penalties and you will have to sue your spouse for breach of the agreement in court.
Minimizing Your Capital Gains
When reaching a divorce settlement agreement, one of the biggest topics covered will be what to do with the marital home. Often times, one spouse will live in the home until the house is sold in the future. If your marital home has appreciated in value, then there may be capital gain taxes owed to the IRS at the time of the sale. Subject to certain IRS rules and regulations, there is a $500,000 capital gains exclusion if, at the time of the sale, you and your spouse are still married (have not yet obtained a final divorce) or you are divorced but the marital home is still titled in both you and your ex-spouse’s names.
However, if after your divorce, the home is titled in only your name, then you can only receive a $250,000 capital gains credit. For this reason, it is critical to consider the capital gains exclusion when determining what to do with the marital home at divorce. Often times, divorced couples choose to keep the marital home titled in both their names so both parties can take advantage of the $500,000 tax exclusion ($250,000 each) once the property is sold. However, this may impact your ability to obtain a loan/mortgage on a new home or residence once you move out of the house. This is one of the reasons why it is so important to discuss tax consequences and the marital home with your family law attorney who can discuss with you creative options for minimizing capital gain taxes.
Typically, the attorney’s fees that you pay for obtaining a divorce are not deductible on your tax return. However, under certain circumstances, you can deduct the money you pay an attorney to obtain alimony or that you pay for tax advice related to your divorce. Before submitting your tax return, discuss with your divorce lawyer whether any of the fees you paid him or her (or any other professionals) are deductible.
These are only three (3) of the top tax issues to be aware of when obtaining a divorce. However, by taking these matters into consideration when coming to the table to negotiate a martial settlement agreement, you will be able to reach the most advantageous arrangement for you and your family and possibly avoid any surprises from the IRS.
If you are considering or currently going through a divorce, you need the assistance of a knowledgeable family law attorney. Your lawyer will help you to maximize your tax credits and minimize your liabilities to the IRS. The family lawyers at the DiPietro Family Law Group have decades of experience with all family law issues in jurisdictions across Northern Virginia, Maryland and Washington, DC.