Going through a divorce can be an extremely emotionally and stressful life changing event. With all the different factors and people involved, it can be overwhelming to know how to begin. Taxes and divorces are complex enough on their own, but together they create a headache best addressed as early and as fully as possible. The right tax considerations will ensure the true fairness of your divorce settlement. In California, here are some of the most common tax issues divorcing couples face:
Failing to File Taxes in the Most Economically Beneficial Way
Couples filing for divorce may have the option to file jointly, married but separate, or independently. Depending on the terms of the settlement, filing one way may provide a better tax outcome than filing another. When possible, couples should put aside their differences to lessen the burden of tax liability and maximize the return.
When parents split, understanding how child custody will affect the upcoming tax season can prevent both parties from trying to claim dependents when filing. Only the guardian who has custody can claim children as dependents on the tax return, in general. However, both parents can agree to split the dependency exemption so both can receive some tax relief in the upcoming tax year. Furthermore, child support is neither taxable nor tax includable.
Failing to Understand Taxable Income and Deductions Regarding Divorce Arrangements
Depending on income sources, assets, and alimony determinations, each spouse may have additional taxable income or deductions to consider if filing separately during the next tax season. For instance, the individual paying alimony can deduct that amount from his or her tax return, whereas the receiving spouse will have to pay taxes on the amount received.
Your filing status is one of the most important things to consider because it is used for many things on your tax return such as deductions and credits. When determining your filing status, you must take into account your marital status on the last day of the year. So if you were still married on December 31st, you must file as either married filing jointly or married filing separately. When filing jointly, you both must include all your income, exemptions, deductions and credits. You are not required to live together to file jointly so long as you are still legally married. If you have suspicions or questions as to whether your spouse is reporting all his/her income; you must contact a California divorce attorney, because you could be held liable for all taxes due as well as penalties and interest.
If your final decree of dissolution of marriage or legal separation was entered by December 31st, you could file as single. Knowing the benefits of the various filing status is a crucial step in planning a divorce. Having a trusted California divorce attorney by your side could make all the difference on your tax returns.
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This is intended as general advice and should not be interpreted as legal advice. Each situation is unique and requires specific analysis of relevant contracts, facts and legal obligations.