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What Tax Considerations Arise in a Divorce?

May 14, 2018

When a marriage dissolves, far more obligations and responsibilities arise than the parties may have originally expected. Financial obligations, in particular, often prove to be the most surprising when spouses go through a divorce. One spouse might not realize he or she must deal with a tax debt even though the other spouse earned all the income. While few would prefer to be burdened with paying debts, learning about such financial obligations during the divorce process at least provides a legal remedy to addressing tax requirements.

Legal Advice Isn’t Tax Advice

A divorce attorney represents spouses in Family Court with the intention of procuring the best possible outcome based on the particulars of the case. Tax matters can and do arise in court proceedings. Divorce attorneys are not, however, tax specialists. Anyone with questions about tax obligations, matters related to filing taxes, delinquency or non-compliance concerns, and other responsibilities would likely benefit from procuring the services of an accountant, CPA, or tax attorney.

Also, those reading this section should consider anything presented herein as tax advice. Rather, the content seeks to provide general information about issues related to taxes in a divorce case. Again, refer all questions related to taxes to a qualified tax professional.

Taxes and a Divorce Settlement

At the conclusion of a divorce case, the two parties arrive at a settlement agreement. The document can be deemed an acknowledgment of and an obligation to adhere to agreements reached between the separating spouses. Child support, alimony, a division of property and other marital assets, and more can be noted in the settlement agreement. Yes, tax issues can be detailed in the settlement agreement as well.

For example, under the law, married couples filing jointly both accept responsibility for the tax debt owed on the return. In the settlement agreement, If one spouse chooses not to pay, the Internal Revenue Service can seek payment from the other spouse. This can be the case even when one spouse earned 80% of the yearly income.

In a settlement agreement, the parties may agree to address the tax obligations in a more equitable and feasible. So, the spouse who earned 80% of the income can agree to pay 80% of the debt per the settlement agreement. This is but one example. A settlement agreement could arrive at many different outcomes in regards to paying taxes owed or cashing a refund check. Divorced spouses can agree on 50/50 agreements to pay taxes or splitting refunds. Or the agreement could go 100% to one spouse. Different agreements occur since there is no standardized and uniform way for spouses to settle anything.

When couples divorce, they find themselves married during part of the year and single the rest. This creates questions surrounding tax filing status. One spouse cannot file a joint return with a spouse who filed a separate return. The joint return can’t be filed unless the other spouse signs off on it. What tax filing status will be selected for the tax year? This becomes something the divorce attorneys and the spouses try to work out. In the settlement agreement, anything agreed upon finds itself in the document.

Tax Matters Related to Children

Spouses with children find themselves looking at questions related to claiming children as dependents on a tax return. In claiming a dependent, the taxpayer finds his or her tax debt reduced. Three children mean three dependents and a significant decrease in taxable income. Although both spouses divorce, the two continue to support the children. Who can claim the child as a dependent? The divorce settlement agreement could state the answer to that question in unambiguous terms.

A common example of how dependent claims are settled involve one parent claiming the child one year and the other parent claiming the child the next. Or, if there is more than one child, one parent could claim a single child as a dependent and the other parent claims the other children as dependents. The parents may very well reverse positions the next year, alternating the same way as would be the case in the previous example of a single child.

Keep in mind, a form may need to be filed with the IRS to establish the dependent claim agreement with the IRS.

Taxes Related to Personal Property

This reflects one of the more complicated aspects of tax liabilities. Not all personal property comes with tax obligations. Jointly-owned furniture doubtfully comes with tax liabilities. A home, however, presents potential capital gains obligations once sold. As is the case with income, someone has to pay the tax due.

What about the rollover of an individual retirement account (IRA) or a 401k? Would taxes be triggered when funds travel from one spouse to another now that both would maintain separate accounts? Working with a tax professional to find out the definitive answers to these questions would be prudent. A tax professional can assist with taking the right steps so as to avoid incurring tax obligations due to making a mistake with the transfer. Of course, determinations related to payments and transfers can be weaved into the divorce settlement agreement.

Attorneys and Negotiations

In order to sign a settlement agreement, an actual agreement must be reached. Careful negotiations must be undertaken in order for all parties to feel comfortable enough to sign off on a settlement. Those hoping the settlement agreement serves them well might find it wise to hire an attorney who also serves them well.

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