When going through a divorce in the state of California, you have much to consider, including alimony, support, the division of assets and future living arrangements. It’s likely that taxes is the last thing on your mind.
However, you should know that divorcing can affect your taxes. You could end up paying more in taxes or less. You could get a larger refund or end up having more deductions. The details will be based on the specifics of your case.
How Taxes are Affected During a Divorce
Generally speaking, taxes for divorcing couples in California are affected in four primary ways: Support, Filing Status, Property Division, and Dependency Exemptions.
Let’s look at those categories in a bit more detail so that you can be fully informed for the tax year.
Your tax filing status is a major determinant in how much you’ll pay for spousal support. Child support isn’t considered taxable or deductible.
Your spousal support will be significantly different, for instance, if you file jointly than if you file separately or as head of household.
When filing separately, for instance, the payor of spousal support will be able to deduct those payments while the payee will have to pay on the taxable income. These deductions and tax additions would be moot when filing jointly.
For this reason, it is important to understand the relationship between your tax filing status and the amounts ordered for spousal support. A recipient of child support might receive more if the other spouse files separately, for instance, but these considerations should be looked at as a whole.
Filing separately might mean receiving more in support, but you may also pay more in taxes. This is just one example of how all aspects of the divorce should be considered so you get the very best outcome for your situation.
You have a few options when it comes to how you file your taxes. If you have already filed for divorce and the case is ongoing, you may file jointly with your spouse. That is because you are still considered legally married under the law. The same would be true if the two of you are separated but no divorce Decree has been signed.
Note that for two divorcing couples to file jointly, both spouses must agree.
In some cases, you may file for Head of Household, even if you have been separated for at least half the year and have at least one child in your care more than half the time.
If you can manage to file as head of household, you will likely pay less in taxes for the year. You can then continue to file with that status after your divorce has been finalized, as long as you are still qualified.
When to File Separately
If your divorce case is ongoing and neither you nor your spouse agrees to file jointly, and you don’t qualify as head of household, you will need to file as married but filing separately.
Many couples attempt to avoid married but filing separately, as that status usually comes with highly unfavorable tax rates. It doesn’t help that California is a community property state, which means that you will likely need to claim at least part of your spouse’s income, even if you file separately.
Generally speaking, your tax burden will typically be lower if you both file your tax returns jointly. For that reason, it’s common for divorcing couples to file this way, even if they’re in the middle of the divorce proceedings.
Filing jointly can also be easier in many ways than filing as head of household or separately, where you’d be tasked with dividing the deductions and dependency exemptions each of you would share.
If you decide that filing jointly is the way to go, be aware that both you and your spouse are equally responsible for the data listed on the tax return. If the other spouse tries any shenanigans like hiding income or property, and you’re ever audited, you would also share in any punishments and penalties assessed.
Keep in mind that you may be audited years from now. If you file jointly, you may have to work with your ex to assess the tax return for the year the two of you divorced. For this reason and to avoid any future headaches, many divorcing couples decide to file separately, despite the potential to pay more in taxes.
Work With Your Spouse to File Your Taxes
You should talk to the other party to determine how you will file your taxes as the two of you divorce. As long as you are legally married up to and on December 31, you can file jointly for that taxable year.
Assess the Joint Tax Return Before You Sign
If you decide to file jointly, never sign the document without first verifying that all data is accurate. Once again, as a joint filer, you both share equal responsibility in all tax obligations and penalties that may be brought on by fraudulent or incorrect data. The lesson is to comb the tax return thoroughly before signing your name.
If you are filing jointly, you both will need to share the refund or liability. Even if one spouse’s income contributed to the refund or liability, you both must share the amount equally.
In addition, neither amount can be stolen. A divorcing spouse can’t confiscate both checks and cash them, in other words. Because you are filing a joint return, both of your names will be on the tax refund, making you equal owners under the law.
Keep in mind that if one spouse is in child support arrears, that amount will be deducted from any refund before it’s issued.
Spousal support doesn’t always mean a monthly payment from one ex to the other. Spousal support can take many forms, including money for rent, mortgage, taxes, tuition, insurance payments, attorneys fees, utilities, and more.
If you are ordered to pay the other spouse support for any length of time, those payments are considered deductible on tax returns. This is important if you are filing separately or as head of household.
If you are receiving spousal support and not filing jointly, that income is considered taxable under the law.
Be aware that spousal support has to be ordered by a Judge and subsequent divorce decree before it can be considered taxable or deductible. The spousal support cannot be based on an informal agreement between the two of you, in other words.
It should be noted that spousal support can be considered non-taxable if both spouses agree and it’s written in the divorce Decree. This may be a consideration if the payor can’t use the deduction due to low income, if the recipient is in a higher tax bracket than the payor, and if the recipient sells property to the payor following the divorce and doesn’t want the proceeds to be considered as taxable income.
If you receive spousal support, you will need to provide your social security number to your spouse. If you don’t, the IRS can charge you $50. Don’t think of the money you receive as free money, as you will end up paying taxes on it.
Paying Spousal Support
If you are the payor of spousal support, you will need to collect your spouse’s social security number. The other spouse needs to give it to you or he or she will be fined $50 by the IRS. Also, be aware that you can deduct the spousal support payments, even if you choose not to optimize your deductions.
California family law states that any income you earn before your separation should be shared between you and your spouse. You can claim any income earned following the date of your separation as yours alone.
When assets are divided – whether it’s a home, bank account, property or investment – you need to consider the tax consequences of each division. In most cases, dividing assets won’t trigger a tax consequence if the transfer occurs within one year of your divorce.
The tax consequences of transferring assets isn’t always apparent, so you should work with your tax accountant to be sure you’re getting a fair shake.
If there are stock investments to consider, there may be a tax liability based on the transfer of the investment. Talk to your California family attorney and tax accountant to ensure your math checks out.
If the family home is to be sold during or after the divorce, that sale may also lead to a tax consequence.
If you each decide to keep the home, then the proper tax liabilities should be considered when figuring out the final buyout total.
If you have already moved out of the family home as your divorce is pending, you can still claim the property as your principal residence when filing your taxes. Your spouse will need to provide written proof that you’ve indeed moved out, which is detailed under the Taxpayer Relief Act of 1997.
If your property is in tax arrears and one of you has already moved out, then you will both be equally liable for the arrears up to the time the other spouse moved out.
When going through a divorce, you and your spouse will need to decide who will claim the children as dependents on your individual tax returns.
There are quite a few tax benefits for California parents, including earned income credit, medical expense deductions, child care credit, head of household filing status, child tax credit, interest deduction for qualified education loans, and more.
Both Federal and California law allows the custodial parent to claim the dependency exemption for all children the two of you share on their income tax returns. However, speak with your divorce attorney, as the law states that both parents can decide on a different route for the dependency allocations if they want.
Only a parent with primary physical custody can claim head of household on their tax returns. If you and your spouse share parenting time equally (a true 50/50 split), then neither parent will be able to claim head of household on that year’s taxes.
If the non-custodial parent wants to claim the children, that can lead to higher child support payments.
The Innocent Spouse Clause
There are laws protecting spouses from an ex’s inaccurate joint tax returns. If you feel that you have fallen victim to an ex filing jointly and erroneously, contact your tax accountant and consider filing separately. The IRS also has steps you can follow to ensure your assets and tax responsibilities remain intact.
Attorney & Tax Preparation Fees
When filling out your tax returns, ask your accountant about deducting some of your attorney and/or accountant fees. This could be possible for both state and federal income tax purposes, but your accountant can give you the proper advice based on your unique situation.
Keep Detailed Records
To keep potential disputes regarding taxes to a minimum between you and your spouse, keep track of all payments, the dates they were paid or received, and even missed payments between you or the other party.
If you are a spouse who doesn’t have access to tax and financial information, which is typical if one spouse handled all the finances during the marriage, make sure you get copies of everything. You are encouraged to go so far as to call the bank to ask about mortgage interest payment amounts and all other details that can affect your tax liabilities moving forward.
Consult a Qualified California Divorce Attorney
Divorce can be complicated, particularly when it comes to taxes. To ensure you are paying the proper taxes and preparing your income tax forms correctly, visit the IRS website and read the Tax Information for Divorced and Separated Individuals document.
Before you file for divorce in California, consult with an experienced divorce attorney, such as the ones at Griffith, Young, and Lass in Carlsbad and San Diego, California.
Even if you’re currently going through a divorce and have questions related to taxes or other complicated details like support, visitation, asset division, and others, call GYL and schedule a free legal consultation.