The Impact of Divorce on Your Taxes

For most people, filing income tax returns annually is a chore best handed off to professionals. This is not to say that plenty of people don’t still try to file their own returns, especially now that they can be done online, but generally speaking, the longer we live the more complex our taxes become, until we really do need an expert to ensure that we’ve got all our ducks in a row. Although some people are willing to risk missing out on deductions that could help them to save or see a larger return, or they’ll hazard an audit down the line with write-offs that may or may not be totally above-board, most of us harbor a healthy fear of the IRS and the havoc they can wreak on our lives. But when it comes to getting a divorce, splitting assets, and figuring out how to file your taxes in the aftermath, you should probably do enough homework to understand the basics, even if you’re happy enough to hand your returns over to a pro.

As part of a couple you probably enjoyed all kinds of benefits associated with taxation thanks to the ability to file joint returns. With blended finances, including shared income, bills, property, accounts, and so on, you likely paid less in taxes overall. But you also got to file only one return for the household. So what happens now that you’re divorced? Well, so long as you were married for the larger part of a year and both parties agree, you can file jointly one last time as a way to save some money. Of course, this may not be possible or advisable depending on the state of your relationship with your ex-partner. And in any case, you’re going to have to file as a single person eventually, so you might as well learn the ropes sooner rather than later.

In terms of assets and how their division may be taxed, you should know that the rules regarding such taxation depend largely on the state you live in. Some states, for example, consider anything accumulated during the marriage to be community property, and as such it must be equitably divided amongst the parties involved. Others allow for couple to split property as they see fit or sue to determine how assets will be divided. Once this has been accomplished, it’s time to determine applicable taxation. In most cases, assets divided between divorcing parties are considered to be tax-free transfers. So if you have $10,000 in the bank and you split it, neither of you will have to pay taxes on the cash. Or if you retain a residence and your spouse is granted a stock portfolio of roughly equal value in exchange, neither of you will be on the hook for taxes on these items.

That said, you would be well served to check in with your tax prep specialist before making assumptions about what you can and cannot be taxed on following a divorce. Whether you kicked off your marriage with a contract from or you decided to wing it, you could end up owing money to the IRS related to division of assets resulting from your divorce. However, you may also come out ahead in this respect depending on the state you live in and how you split up your marital assets. In any case, a professional should be able to help you determine the most advantageous route so that you can avoid further financial hardship following a divorce.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>