How does divorce impact my taxes?
Once you decide to divorce, you must figure out how to split assets and debts. If children are present, you also need to agree to a child custody arrangement as well as child support. These decisions on their own are heavy, but they are only the beginning. It is important to look beyond the initial discussion and consider other factors that will impact the final divorce agreement.
One important area of concern often forgotten: taxes.
A failure to take the tax implications of the divorce into consideration can result in an unexpected, and possible unmanageable, tax bill down the road. The following tips will break down some of the major tax concerns to discuss before finalizing your divorce and reduce the risk of future surprises from the Internal Revenue Service (IRS).
Consideration #1: The bill
Generally, if you give another individual an asset of significant value, the IRS will expect a cut. Although the IRS does not tax most assets transferred due to the divorce, there are exceptions. For example, you can generally transfer the ownership of real estate during divorce without a tax penalty. However, the new owner will need to pay taxes if they decide to sell the home at a later date. As a result, if you are taking ownership of the home with the plan of selling in the near future, it may be best to reconsider. Capital gains in general can pose a problem. This means that any asset you gain ownership of as a result of the divorce that gained value may lead to a tax bill when you decide to sell the asset. Get this information before agreeing to the asset division determination of the divorce proceeding to help better ensure you understand exactly what you are agreeing to.
If children are present, address which parent will take the tax credit. Generally, this goes to the parent who has the children for the majority of the year. Parents can choose differently but would want to include this decision within the divorce settlement agreement to help reduce the risk of confusion in the future.
Amounts paid for alimony or spousal support are no longer deductible for the taxpayer making the payment or reported as income for the taxpayer receiving the payment. This is true of any divorce agreement finalized or modified after 2018. This change was the result of the Tax Cuts and Jobs Act (TCJA).
Consideration #2: Updates
After the divorce is finalized, the IRS recommends reviewing withholdings. It is likely that you will need to update this within 10 days of the finalization of the divorce. You may also need to update your name, address, and contact information.
It is important to consider the impact on Ohio state tax obligations as well.
Consideration #3: Delegate
You do not have to go through this process alone. You can hire experts to advocate for your interests so you can focus on moving forward with your life.