A divorce can be incredibly challenging to go through from an emotional standpoint. However, a divorce will also have a big impact on your taxes in ways you didn't think about. That's why it will be helpful to know the following changes so that you can prepare for them.
One immediate change that will happen after a divorce is the need to change your filing status for tax purposes. You will not be able to file a joint tax return, or even as a married person filing separately. You'll only be able to pick between being single or the head of the household. This can make a big impact on your tax bracket, the deductions that you can take, and the credits you receive.
It is likely that support payments will be made by one person after a divorce, either in terms of spousal support, child support, or both. It's important to know how the tax system treats these payments on the state and federal levels. For example, those spousal support payments are no longer allowed to be a federal tax deduction for the payer, and those payments are considered taxable income for the recipient. However, state taxes may treat that income differently than at the federal level.
Child Tax Credits
Hoping to receive that child tax credit to get a refund at the end of the year. Unfortunately, only one parent can take the tax credit, which is typically based on who the child spent the most time with during the year. If you have a true 50/50 custody split, you'll need to decide on who takes the tax credits each year. Some people decided to alternate between years so that the tax credit is shared.
There are many assets that get divided during the property division part of the divorce. However, some property actually increases in value and can trigger a cash payment when sold. This is common when a house needs to be sold and the profit is split between both people. Capital gains taxes may end up being paid on the property if it's worth more than what you bought it for.
It's important that retirement accounts are properly separated. This is due to there being penalties if there are early distributions from a retirement account that could count as earnings. You'll want to make sure that the proper paperwork is done when transferring funds to avoid those fees.
Reach out to a divorce lawyer for more information about the tax implications of divorce.Share