Divorce is a major life event that can have a significant impact on many aspects of your life. In fact, it can affect your taxes in various ways.
Understanding how divorce can result in tax-related changes is necessary to ensure compliance with the law.
Filing status and dependents
One of the key changes after a divorce is your filing status. According to the Internal Revenue Service, your filing status for tax purposes is determined by your marital status as of December 31st of the tax year. If your divorce becomes finalized by this date, you will need to file as single or head of household, depending on your circumstances.
If you have children, deciding who can claim them as dependents for tax purposes can be a contentious issue in divorce proceedings. Generally, the parent who has primary custody of the child is entitled to claim them as a dependent. However, people can negotiate and specify this in the divorce agreement.
Property division and other issues
The transfer of assets between spouses as part of the divorce settlement may have tax consequences. It is beneficial to understand the tax implications of property division when navigating this aspect of divorce. If retirement accounts such as 401(k) or IRA become divided as part of the divorce settlement, special rules apply to ensure tax-deferred treatment. A qualified domestic relations order (QDRO) may become necessary to transfer retirement funds without incurring taxes or penalties.
Before, during and after the divorce process, it is important to make informed decisions to avoid any potential pitfalls during tax season.
