Divorce is complicated and can impact every aspect of your life including taxes. So, how does divorce affect your taxes and how do you prepare? Keep reading to learn more.
Divorce and Finances
Divorce is a lengthy and complex process that can involve drastic financial adjustments. One of the most important steps in the divorce process is property division. Property division is the process by which the court divides marital property between spouses.
New York is an equitable distribution state meaning all marital property is divided equitably. It’s important to note that “equitable” does not mean “equal.” Equitable division means that property is divided based on the most optimal arrangement. For example, if one spouse stayed at home with the children and did not work, the court may award a larger portion of the marital estate to ensure that they can maintain a comparable standard of living after the divorce.
It's also important to understand that various types of assets are subject to equitable division. In fact, military benefits, pensions, investments, and debts could be divided between spouses. This means that an individual’s taxable income and property taxes but how?
When evaluating how divorce affects taxes there are a few things that inevitably change. For starters, if an individual is married, they could be used to filing jointly with their spouse. After divorce, how a person files their taxes will change.
Additionally, if there is a child support agreement child support could be tax deductible depending on the year and circumstances surrounding the divorce. Family support could also be taxable for the support recipient. However, each divorce case is different and there may be restrictions on how support can be taxed and whether it is exempt.
It’s also important to note that an individual who does not have custody of their children cannot claim them as dependents. Alternatively, for the custodial parent, it may be beneficial to claim head of household. This ensures that there is sufficient support for the dependents.
What You Can Do to Prepare
If you are considering a divorce, or have already filed, it’s important to take measures to adjust how you file for taxes to prepare for the future.
A few ways to prepare yourself and your finances include:
- Update Withholding: Newly divorced people often need to file a new Form W-4 with their employer to adjust their tax withholding amount
- Research Alimony and Separate Maintenance: As mentioned previously, financial support from a divorce settlement could be subject to exemptions or taxation depending on the circumstances. It’s crucial that you research your options and prepare yourself for these changes.
- Report Property Transfers: You must report any transfers of property between you and your former spouse because of the divorce
- Determine Dependent Claim: As mentioned prior, some spouses may retain custody of their children. The custodial parent can claim their child as a dependent while the parent without custody may not claim the child as a dependent.
Divorce and taxes are complicated and can have significant impact on each other. It’s crucial that anyone facing divorce take steps to prepare for changes to their taxes in the future. It is also important to enlist the help of a qualified attorney. An attorney can help you pursue the most optimal result so you can build a better future.
Contact Arnel Law Firm today for more information.