For couples undergoing divorce in Texas, there are many legal and personal issues that must be addressed even before filing. Taxes, as it does with most everything else, plays a role.
The IRS greets divorce with a required change of filing status. A spouse must use their marital status as of Dec. 31 for determining their filing status. The IRS treats a couple as being unmarried for the entire year even if the divorce took place later in the year.
Single-earner spouses usually face a tax increase from filing as unmarried taxpayers following divorce. Two-earner spouses with close to equal incomes will likely have a tax decrease. Spouses must also determine whether they can receive the advantages of a head of household status.
The family house should be resolved as soon as possible. When both spouses move out and sell the property, they are usually eligible for the capital gains exclusion on the sale of personal residences. However, there is a two-year residency requirement and delays could cost exemptions up to $500,000 on gains from the sale of property.
Children play a key part in tax benefits such as the Earned Income Tax Credit, the Child Tax Credit and the Child and Dependent Care Tax Credit along with personal exemptions that can reduce a parent's taxable income. The custodial parent is usually entitled to tax benefits but both spouses can agree to allocate benefits among both their returns. However, parents should emphasize the best interests of the children when considering child custody and financial matters over any tax advantages.
At least for now, alimony is deductible to the payer and taxable to the recipient. Maintenance and child support are not deductible or taxable. Divorce settlements may be designed to take these tax ramifications into consideration.
Property division of retirement plans has consequences. Taking withdrawals out of retirement plans such as a 401(k) can have immediate tax consequences and penalties. However, spouses can use a Qualified Domestic Relations Order to avoid tax consequences by taking funds from one spouse's account and placing it another separate account for the other spouse. This account provides tax-deferred growth while the funds stay in the retirement plan account.
An attorney can help a spouse seek a financially-sound decree that takes taxes into account. A lawyer can help assure that reasonable options are presented and sought in the divorce.
Source: The Motley Fool, "5 tax moves to make now if just got (or are getting) divorced," Dan Caplinger, Nov. 13, 2017