There’s no two ways around it: divorces are difficult moments in our lives, as two people attempt to disentangle themselves from a complex legal agreement. It’s a process that inevitably involves financial discussions and provisioning, which makes it critical that people going through a divorce retain a competent attorney and/or tax professional to help with these issues.
If you think you understand the ramifications of your divorce settlement just on the surface level, raw financial figures… think again. Often, the real picture of how the settlement plays out financially can’t even be calculated until tax considerations come into play.
Interestingly, it’s often in the best interest of both parties to minimize tax obligations entering the divorce proceedings themselves. After all, the more you can avoid paying unnecessary taxes, the more assets there are for both people, helping the process be less expensive and potentially more amicable.
Whether you participate in mediation or not, you’ll need to come to an agreement on critical financial terms and give yourself a clear idea of your new tax rates and obligations post-settlement.
You probably already realize that there are tax considerations when dividing property in a divorce, but don’t forget that taxation comes into play on everything from alimony to dependent deductions. Here are some things you’ll need to keep in mind when considering the tax consequences of a divorce.
The Marital Home Brings A Big Deduction
If you own a home with your spouse, you’re probably so used to taking a deduction on that home that you’ve forgotten just how big a chunk it takes out of your tax obligation. For the partner who doesn’t keep the home in a divorce, it can be shocking to discover that the juicy tax shelter that came along with the property is no longer available.
Your Personal Tax Rate and W4 May Change Dramatically
Depending on your new financial obligations or assets pending the divorce settlement’s execution, you may need to adjust your W4 and/or get used to being in a new tax bracket. Obviously, these changes come with some pretty big effects on your personal rate of taxation, so get ready to totally re-adjust the way you view your personal finances.
Tax Evasion and Divorce
You cannot attempt to illegally shield your assets simply because you suspect that a divorce is looming. However, marital problems can cause even the most otherwise level-headed people to think irrationally. As a result, many people who have tried to move assets offshore (or otherwise conceal shared marital wealth to insulate it from the divorce) find themselves facing tax evasion charges. Be aware of this and act accordingly.
Alimony and Dependents
When alimony is paid from one spouse to another after a divorce, in most cases that alimony is tax deductible for the payer (and is taxable, for the receiver). Depending on your specific arrangement, a good tax attorney should be able to help either party maximize this situation to their personal benefit. Additionally, decisions made about the custody of any children can determine who is able to take a dependent deduction when it comes time to file taxes.
Tax issues during a divorce can be a serious mental burden for people who are already going through a trying time in their lives. As you can see, there’s a lot to consider just in terms of tax considerations during divorce proceedings. The decisions and details that result from divorce negotiations will have a lasting impact on both parties’ finances for years and years to come. This isn’t a situation to be entered lightly — it’s one that should be thought of as an investment in your future life.
As such, if you’re getting divorced, you should consider hiring an experienced and discreet tax attorney like the ones at Abajian Law to review your financial picture. Retaining a lawyer at this stage of the game can save you untold portions of your wealth in both the short- and long-term following the divorce’s finalization. Protect yourself and make sure you get the best possible deal out of your proceedings by enlisting a veteran tax attorney to advocate for your best interests.