Tax Planning in Divorce
A divorce is stressful, and the thought of figuring out the tax implications of this major change in your life can be daunting. However, understanding tax planning in a divorce is often essential to your financial future. If you are going through a divorce, it is important to consult a skilled San Diego divorce lawyer who can assess your situation. At our firm, we are committed to providing careful and strategic guidance during a high-asset divorce proceeding. We recognize that this is a difficult time in your life, and you can expect compassion and vigorous advocacy from Attorney Roseline D. Feral.Common Issues Related to Tax Planning in a Divorce
In many cases, property transfers that take place as part of a divorce do not cause capital gains or losses for either spouse, so there are no direct tax penalties for giving up or receiving property in a divorce settlement. However, the situation can become more complex if an ex-spouse chooses to sell property that they received in the divorce, especially if this is a late-life divorce following a long marriage. When this happens, and the property has increased in value since the divorce, the selling spouse may owe capital gains taxes based on the value of the property at the time that it was purchased. Typically, a person who sells their house after a divorce can exclude up to $250,000 in capital gains from their taxable liability if they owned and lived in the home as a primary residence for at least two of the prior five years. If the divorce is finalized prior to the sale of the home, the $250,000 reduced exclusion may qualify even if the two-year test is not met.
Spousal support is considered taxable income to the receiving spouse, so it is deductible for the spouse making the payments on their income tax returns. If you are the party who pays spousal support, you are eligible to claim those payments as a tax deduction even if you choose not to itemize deductions. You should note, however, that you must have your spouse’s social security number and a formal payment arrangement that is clearly outlined in your divorce settlement in order to qualify for this deduction. Child support payments, on the other hand, are not tax deductible by the paying spouse, nor are these payments counted as taxable income for the receiving spouse.
Spouses who want to separate one or more retirement accounts during a divorce need to engage in careful planning to avoid paying taxes on the transfers, as well as other fees, such as withdrawal penalties that often kick in for people who take money out of a retirement account before they have reached retirement age. If money is withdrawn from a retirement account during a divorce and given directly from one spouse to the other, it will be taxable under the rules of the IRS. This can be avoided, however, if the transfer is done through a QDRO, which allows the receiving spouse to obtain the money and avoids a tax consequence for the paying spouse.
Divorce raises questions of child custody for couples who have young children. In California, a parent can receive a significant tax break for claiming a child as a dependent. It is important to note that only one parent can claim each child per year, so it is typically the custodial parent who claims the dependency exemption. However, this is not set in stone, and the law allows parents to decide who will claim the exemption each tax year. For example, the parents may come to an agreement in which they mutually decide to alternate years claiming the exemption.Explore Your Options with a Knowledgeable Divorce Lawyer in the San Diego Area
Divorce is never easy, and it can be even more stressful when you are worried about the tax consequences of your split. If you are going through this process and need guidance in terms of tax planning in a divorce, you need to reach out to a capable San Diego attorney as soon as possible. With nearly 30 years of experience, we understand the nuances of this area of law and can help guide you through the process. Roseline D. Feral represents clients from many different areas of Southern California, including Chula Vista, Coronado, Del Mar, Carlsbad, Encinitas, La Jolla, Oceanside, Escondido, Ramona, Rancho Santa Fe, San Marcos, Valley Center, and Vista. For more information, you can contact us online, call our office at 619-232-1010, or reach Attorney Feral directly at 619-301-1191.