Divorce and Taxes
In 2011, out of every 1000 people in this country, 3.4 folks got divorced. That may seem low but put a different way, if you're on your first marriage, you've got a bit better than a 50% chance to stay together. And if you've already burned through a marriage, you're even more likely to separate. The point? A divorce can seriously muddy your taxes and if you're going to cut the chord, you should know the consequences.
Even if you're divorced you're responsible for any and all taxes that you incurred as a couple. That includes interest and penalties that are due during the tax year before your marriage ended. This is true even if a divorce judgement states that one party is exonerated from all responsibility on the current or previous tax years.
Generally, divorce will impact your finances in 3 ways. It will affect your property, it will affect the costs surrounding your children, and it's possible you will have to pay alimony. All of these conditions will put a hurting on your tax liability.
Property
So property doesn't just refer to your residence. It also includes cash accounts, health savings accounts, medical savings accounts, and retirement accounts. It can be personal property, like a car, boat, motorcycle, or tools. It also includes real property like land, a vacation home, or your own private island.
If you transfer property due to a divorce, you don't have to record any movement of cash on that property. That's because there wasn't any realized profit or loss. But if you sell the property (due to a property settlement), you're responsible to pay taxes on any profit or earn a deduction for any loss. Just remember that you will have to split the amount of the asset or the liability.
Alimony
Alimony is a payment to your ex as mandated by a divorce judge. It generally happens when you make a boatload of cash and your spouse does not. When you're married you need to support each other. Fair or not, when your marriage ends, the support could continue.
Fortunately, alimony is deductible. It also needs to be claimed by the recipient. So if you pay $1,000 per month or $12,000 per year to support your ex significant other, you can deduct it from your income. The recipient of the payment will also need to add that $12,000 to their yearly income. There are no free lunches in the eyes of the IRS.
Kids
Exemptions are big for taxpayers as they're worth $3,650 each. So if you have 3 children they will reduce your income by $10,950. But if you're getting divorced only 1 parent will be able to claim the kids. So how do you know who gets to write off the children? Why the custodial parent of course.
A custodial parent is the parent whom the child lived with for the greater number of nights throughout the year. Alternatively, the noncustodial parent has fewer nights with the children. If the child spends an equal number of nights with both parents, the custodial parent is the one with the higher adjusted gross income. That's because the parent who makes more is expected to provide more for the child.
Divorce is Expensive
You're not allowed to deduct any legal fee's associated with your divorce. That includes advice and any counseling. You cannot deduct any fee's you pay to your ex-spouse for anything other than recognized alimony. So paying for a move or paying off your half of the car aren't deductible.
But if you paid legal fees for tax advice, like appraisers or accountants who helped you figure out your post divorce tax, you're in luck. If you paid fees to help you collect alimony, then you get to deduct that as well.
Happily Ever After
Divorce will complicate the financial recording of everything from your kids to your property. And if you thought your divorce was messy, wait till you see how hard it is to separate your property so you can get your taxes straight. Empathy isn't one of the IRS biggest traits, so while you may be going through a tough time, you're going to have to pay every dime of tax. The trick is to effectively separate your stuff, so it's fair and equitable to both parties. Then you each can pay what you owe and go on your merry way.
