Ask a Family Attorney – Divorce and Taxes
Disclaimer: The information provided regarding tax issues related to divorce is not meant to be taken or relied upon as tax advice. Tax issues related to divorce cases can become very complex and require the skill of an expert in the field of tax law. We at Griffith, Young & Lass advise all of our clients to obtain independent tax advice prior to making any decision that may result in a tax consequence.
The following is a list of common tax related questions that come up in our experience with California divorce cases:
Who gets to claim the kids as tax exemptions?
Absent an agreement to surrender the exemption, the parent with more than 50% custodial time with the child has the right to claim the child.
Should we file separate or joint returns before the divorce is final?
It depends on: 1. Whether you collectively save more money filing a joint return or separate returns and; 2. Whether you can reach an agreement regarding the proportional allocation of tax liability or tax return.
If you decide to file separate returns in a split tax year during which you separate from your spouse mid-year, each party claims as income 50% of the total income earned between the parties pre-separation plus 100% of individual separate income earned after separation. You divide tax deposit and withholding credits in the same manner.
We filed a joint return— how do we split the refund or liability?
The refund and/or liability is generally either agreed upon to be divided evenly or allocated proportionally with the basis being each party’s respective liability or entitlement had they filed separate returns.
Who gets to claim the mortgage interest and property tax deductions?
If there is no agreement to divide the deduction then generally the party paying the mortgage and property taxes gets the benefit of the deduction.
Can I deduct child support?
No. Child support is not deductible by the payer nor claimed as income to the payee.
Can I deduct spousal support?
Yes. Court ordered spousal support payments are deductible by the payer and the payee must claim spousal support as income. There are special rules recently implemented and enforced by the IRS that must be considered in cases wherein large lump sums for spousal support are followed by large step downs. This area of tax law is constantly evolving and your divorce lawyer will work closely with a tax expert in order to ascertain potential pitfalls related to spousal support settlements.
Are there tax consequences when we divide property?
Generally a transfer of property between spouses is a non-taxable event. When retirement accounts such as IRA’s are divided, a separate IRA is designated by the non-owning spouse and his/her predetermined portion is simply rolled over into the new account for a nominal service charge. Division of 401K accounts generally require the preparation of a special order for division known as a QDRO or “Qualified Domestic Relations Order.” There are no taxes or penalties associated with these transfers.
One common negative tax consequence related to the division of property that must be considered when deciding on how to dispose of community assets is tax on capital gains. If, as part of your divorce an investment asset with a particularly low tax basis is sold in order to divide the proceeds evenly, the tax liability on the gain could eat up a large portion of the proceeds.
If you are concerned or have questions regarding the potential tax consequences related to your San Diego divorce case call our office for a free consultation at 858-345-1720. We can get you started with some general information and direct you to one of our network of finance professionals.