While January is a popular time for people to initiate divorces, it may not be so friendly to do so for tax purposes. Indeed, there are some advantages to start the process early in the year (getting it over with is one of them) but in the haste of trying to get unhitched, some parties forget about the important tax implications that can come with a divorce decree.
This post will highlight a few of these issues and provide a short explanation as to why they are important.
What is your tax filing status – Your marital status for tax filing purpose is likely the most important question to be answered as you prepare for your new life. Generally, your marital status on December 31 of the prior year dictates your tax filing status. This question is important because you do not want to miss out on some of the higher exemptions afforded to married couples compared to single people.
How will you report additional income – Your divorce settlement may include additional income from the sale of a home or the sale of securities. Knowing how this will affect your taxable income, and how you will report these benefits going forward is an important consideration.
Who will receive the child tax credit – This question is especially critical for couples who are granted joint physical custody of children. Some discussions will be needed to determine who is entitled to claim children on their tax returns.
Working with a seasoned divorce attorney who has experience dealing with tax issues would be helpful in answering these questions.