Change in Filing Status, Deductions and Credits
Your tax status is considered as of the end of the year. If your divorce is not finalized during the year, then you need to decide whether to file jointly or to file married filing separately. Normally, it is more beneficial to file jointly; however, considerations of income to be included on each return and the issue of unreported income may make a difference in the decision as to which way to file. You should also consider what are the deductions that can be taken by one party or the other. If you are the primary care giver for children, you can change you filing status to Head of Household which will lower your tax rate. You can also claim the child tax credit. The deduction for the children will go to the parent that has the children a majority of the time; however, if the parties agree or the court makes an order, the deductions will be shared between the parties.
Income May Change As a Result of the Separation of the Parties
The general rule in Washington is that earnings of a party will be community property when earned during the marriage. When there is a separation of the parties with the intent that it will be permanent, then earnings of a party after the separation may be the separate property of the spouse that earned the income. The parties should consider the tax impact of filing separately or jointly when considering how much will have to be paid to the IRS.
Locate All Information on Current and Back Taxes
You and your tax professional will need to address the tax issues for the current tax year. In addition, you will want to locate the back tax returns and determine if there is any back taxes owing. If your spouse has back taxes owing, you may have a back tax obligation.
Understanding Child Support and Maintenance
Maintenance, previously known as alimony, is based upon the need of one party and the ability of the other spouse to pay. Maintenance is taxable to the receiving spouse and deductible on the tax return of the paying spouse. Child support on the other hand is not taxable or deductible to either party. In support orders entered by the court that provide for undifferentiated child support and maintenance, the IRS will treat the funds paid and received as maintenance which means that there will be tax implications. In addition, the IRS has special rules for treating payments as maintenance or support and you should make sure that you talk with your tax professional.
Property transferred between former spouses within one year is usually tax free. Transfers that are structured as maintenance payments should be carefully reviewed so that they have their intended results as either taxable or non-taxable. The division of property needs to take into consideration any gain that will be associated with that property when it may be sold. Assume that the parties have two pieces of property each of which is worth $100. If property A was bought for $30 and property B was purchased for $100, property A has $70 of potential gain and property B has -0- gain.
Talk With Your Attorney
Review the issues relating to taxes and property division with your attorney and obtain tax guidance from your tax professional.