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3 income tax issues that can complicate divorces

On Behalf of | Jun 4, 2024 | Divorce

Divorce creates a variety of challenging financial matters for people to address. For example, spouses have to find ways to divide their property with each other.

Divorce typically takes months to complete, meaning that there can be some challenging financial matters that arise between when people decide to divorce and when the courts actually finalize their divorces. There may be income tax matters that spouses have to address the year of their divorce and after their divorce.

Tax credits for children

The ability to claim children as dependents can lead to sizable income tax benefits. Current tax rules do not allow both parents to claim the children separately. Only one parent can claim a child each year. Parents might agree to let each parent claim some of the children in the family. They may alternate years in which they claim the children for tax purposes. Other times, the parent with more parenting time and responsibility might claim the children every year. Negotiating those arrangements can be a real challenge.

Property sales that affect taxes

Selling off long-term investments as a way of dividing their value could lead to capital gains taxes. Withdrawing funds from a retirement savings account without filing the proper paperwork ahead of time could lead to income tax consequences and penalties as well.

Income taxes during the transition

If couples legally separate, then each spouse can theoretically file taxes as though they are the unmarried head of their own household. However, if they simply divorce without legally separating first, they have fewer options for their income tax returns. Only after the courts finalize the divorce can people truly separate their tax responsibilities. Spouses may need to negotiate filing together one or even two more times as part of the divorce process. Additionally, selling or transferring assets during a divorce can potentially lead to tax complications, and spouses may need to plan carefully to avoid unnecessary taxes.

Recognizing that divorce can cause certain tax issues and requires discussions of other tax concerns may help people minimize the financial impact of a complicated divorce.