Although tax season may have come and gone, several tax issues can arise during a divorce that could either save or cost you if you’re not careful. It’s always advisable to discuss your situation with a family law attorney and possibly an accountant. Here are some significant tax considerations when going through a divorce:
Determining Which Status to File
While your divorce is pending, one of the toughest decisions is choosing your filing status. Should you file a joint tax return with your soon-to-be ex-spouse or not? Filing jointly can result in a lower tax rate, but it also comes with disadvantages. For example, if you file a joint return, both you and your spouse are jointly and severally liable for all taxes owed. This means that if your spouse doesn’t pay their portion of the taxes, the IRS can come after you for the full amount. Additionally, any federal or state tax debts owed by your spouse could be taken from your joint return to satisfy their obligations.
To mitigate these risks, consider signing an agreement with your spouse regarding tax liabilities and refunds before filing jointly. However, keep in mind that the IRS can still pursue you for unpaid taxes, interest, and penalties, even with such an agreement. You would need to sue your spouse in court for breach of that agreement.
Minimizing Your Capital Gains
When negotiating a divorce settlement, one significant topic will be how to handle the marital home. If one spouse continues living in the home until it’s sold, any appreciation in value could result in capital gains taxes when the house is sold. Subject to IRS rules, there is a $500,000 capital gains exclusion if, at the time of the sale, you and your spouse are still married or the house remains in both your names post-divorce.
However, if the home is only in your name after the divorce, you are only eligible for a $250,000 capital gains credit. This is why it’s crucial to consider the capital gains exclusion when deciding what to do with the marital home. Some divorced couples choose to keep the home titled in both names to maximize the $500,000 exclusion when selling the property. However, this could impact your ability to obtain a loan or mortgage on a new residence. Discussing tax consequences and creative options for minimizing capital gains taxes with your family law attorney is essential.
Attorney’s Fees
Typically, attorney’s fees for obtaining a divorce are not tax-deductible. However, you may be able to deduct fees paid for obtaining alimony or tax advice related to your divorce. Before submitting your tax return, consult with your divorce lawyer to determine whether any of the fees you’ve paid to them or other professionals are deductible.
Final Thoughts
These are just three of the primary tax issues to be aware of when getting a divorce. Considering these factors during settlement negotiations can help you reach a more favorable outcome and avoid surprises from the IRS.
If you are considering or going through a divorce, it’s important to work with a knowledgeable family law attorney who can help you maximize tax credits and minimize IRS liabilities. The family lawyers at the DiPietro Family Law Group have decades of experience in family law matters across Northern Virginia, Maryland, and Washington, DC.
