When you are in the process of getting a divorce, the last thing you are probably thinking about is your tax return. However, there are often significant tax consequences for both spouses after a divorce judgment is finalized. Both you and your attorney should be familiar with the possible outcomes, so you are not hit with an expensive surprise after the divorce is complete.
Dependents, Child Support, and Alimony
By far the biggest question for most couples is how to handle child and spousal support (also called alimony) in regard to tax liabilities. Child support differs somewhat from spousal support in that child support is not tax deductible while spousal support is. Conversely, child support is not included in taxable income for the spouse who receives it, but spousal support taxable.
Even if you cannot deduct child support, you may be able to claim your children as dependents. The IRS offers several child-related tax credits but is clear that only one parent may claim a particular child in a given tax year. Usually, the parent with the majority of the parenting time will claim the child tax credits, but the other parent may be able to do so if it is stipulated in the divorce decree, or if they provide half or more of the child’s support.
Property and Asset Transfers
The other major questions that come up in a tax context after divorce have to do with property division and assets. It is important to differentiate between value and basis and to understand that even if you receive more property, it may be a net loss due to capital gains tax.
Basis is defined in legal terms as the value assigned to an asset for purposes of sale or transfer. It takes into account the asset’s purchase price along with any possible deductions you might take. For example, if you purchase an automobile for $40,000, and are able to claim $5,500 in deductions, the adjusted basis of the car is $34,500. If you later sell the car for $44,500, the net gain is $10,000, even though you paid $40,000 for the car. This is important because capital gains taxes are calculated on basis not initial value, when it comes to most assets.
When an asset is sold at a profit, it may be subject to what is referred to as a capital gains tax. You must pay capital gains tax on any profit you obtain that is over the amount of legally permitted exemptions. For example, you may claim $250,000 in exemptions as a single person when you sell a home. If you received the marital home in your divorce, and it is worth $400,000, but you sell it for $600,000, you will pay capital gains tax on $350,000 (the sale price minus your exemption amount). It is critical during a divorce that your attorney know how to negotiate a property settlement with terms that are reasonable and that will not leave you with a tax bill you cannot pay.
Contact a Property Division Attorney
Divorce is intimidating enough without the possibility of owing the IRS more money than you have. The skilled St. Charles divorce attorneys at Bochte, Kuzniar & Navigato, P.C. understand the financial aspects of divorce. We will work hard to create a settlement that is both equitable and manageable. Contact us for a free initial consultation today.