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Divorce can already be deeply complex—legally, financially, and emotionally. Adding the California Tax Code to your divorce proceedings only adds to the uncertainty and distress of the situation. If you are unfamiliar with divorce law, then you are likely just as unfamiliar with the tax laws surrounding divorce. Let the Law Office of Michael R. Young help you navigate the uncertainty of family law.
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Below, we have prepared a guide to the tax consequences of a divorce in California.
Is Joint Filing Still Available During the Divorce Process?
Selecting the appropriate tax filing depends on whether the divorce has resolved. If the divorce process continues beyond December 31st of the applicable tax year, both parties may agree to a joint return. “Married filing jointly” is allowable, even if the parties have been legally separated for some time, provided that the divorce has not been finalized by the court. Both parties must use joint filing on each of their returns. However, when divorce has been finalized prior to December 31st of the tax year, joint filing is not permitted. At that point, the only available filing statuses are “Single” or “Head of Household.”
It is important to discuss filing statuses with your divorce and family law attorney, as well as a professional tax advisor. Generally, a joint return provides tax benefits. As a result, tax burdens are reduced based on income, deductions, and credits. However, both parties are jointly responsible for any tax obligations, including interest and penalties.
Because filing jointly generally provides a benefit to both parties, doing so can be a negotiating tool; showing good faith and a willingness to cooperate. On the other hand, it is possible for one spouse to agree to a joint return, but later back out. A court will not force the unwilling spouse to file the joint return, and it is very rare for the IRS to accept a joint return with only one spouse’s signature.
My Spouse Won’t Agree to a Joint Filing—How Should I File?
If both parties cannot agree to a joint filing before the divorce is finalized, there are two options for filing:
- Married Filing Separately
- Head of Household
Head of Household provides for the benefit of a larger tax deduction and better tax brackets, provided that you meet certain criteria. You must have a dependent residing with you for at least six months of the tax year, and you personally must have financially contributed to at least half your home’s upkeep.
What Liability Exists on a Joint Return?
If you and your soon-to-be ex-spouse agree to file jointly for your last tax year, understand that you both may still be subjected to joint tax liabilities. For example, if one spouse claimed too many allowances during the tax year, creating a $5,000 tax bill to the IRS, both parties will be jointly responsible for paying that bill. For these reasons, it is important to have your attorney and tax advisor review both parties’ tax issues prior to making the decision as to whether you will file separately or jointly.
What About Spousal & Child Support?
Spousal support is considered taxable income to the receiving spouse, so it is deductible to the spouse making the payments on income tax returns. Child support payments, however, cannot be deductible by the paying spouse, nor are they counted as taxable income for the receiving spouse.
- There are other considerations that must be taken into account when making spousal support payments.
- “Front-loading” spousal support payments is not acceptable to the IRS, so it will create tax consequences. This is to prevent concentrated payments to the receiving spouse shortly after divorce, to avoid paying the sum total over a period of time. The IRS considers front-loading to be a form of “property settlement.” Property settlement does not allow spousal support tax deductions to be applied to the paying spouse.
- If alimony payments to a custodial parent cease within 6 months of a child’s 18th or 21st birthday, the IRS may launch an investigation into the nature of the payments. Why? Because, if the nature of the payments appear to have been for the benefit of the child until the age of maturity, the IRS will classify the payments as child support.
Remember that child support payments do not have the same tax benefits for the paying spouse.
Who Gets to Claim the Dependency Exemption for Children?
Under both Federal and California tax laws, the custodial parent may claim a dependency exemption for all of the children on his / her tax returns. However, in cases where the divorcing parties are able to reach amicable agreements, they can agree to override the dependency exemption.
This allows the parents to decide who will claim the exemption each tax year. An additional benefit of reaching a dependency exemption agreement is that it will not have an effect on the party claiming a head of household filing status. Furthermore, provided that the claiming spouse’s income is not too high, he or she may be entitled to an additional $1,000 per child tax credit for each child under the age of 17.
What Other Tax Deductions & Credits Are Available?
Even if your ex-spouse has retained custody and claims child exemptions, you may be entitled to additional deductions on annual taxes. For example, if you continue to pay your children’s medical bills, you may include them as a medical expense deduction, regardless of custody. While you may not be entitled to claim the child tax credit, due to your ex-spouse’s custodial status, you may still claim the childcare credit for any work-related expenses incurred for the care of children younger than 13.
What About the Sale of the Marital Home or Retirement Funds?
Generally, the couple will own a marital home at the time of divorce that will no longer be occupied by either party. If the decision is made to sell the home upon divorce, there may capital gains taxes that apply to either party. Typically, these taxes may be avoided if you lived in the home for at least 2 of the past 5 years of ownership, which will allow you to exclude the first $250,000 of gained capital from your taxable liability and the sale occurred prior to the finalization of divorce. If divorce is finalized prior to the sale of the home, the $250,000 reduced exclusion may qualify even if the 2-year test is not satisfied.
It is common for retirement assets to be included in a divorce settlement, where one spouse who has gained considerable retirement savings is required to transfer a portion.
If the money is withdrawn from a retirement account and given directly to the ex-spouse, the IRS will deem this to be a taxable event. This is avoidable, however, by setting up the transfer to occur under a QDRO. This will allow your ex-spouse to receive the funds and avoid a tax consequence on your end.
Call (909) 315-4588 for a Consult About Your Taxes & Divorce
It is important to sit down with a both an experienced family law attorney and tax advisor during the divorce process. Our legal team at the Law Office of Michael R. Young has demonstrated experience in navigating and negotiating the tax implications associated with divorce.
Call today for a consultation to discuss creating an effective strategy that will minimize your tax liabilities: (909) 315-4588.
- Thinking about filing for divorce
- Concerned about custody of your children
- Worried about the division of your property
What is a contested divorce
When spouses don’t agree on an issue, whether it involves child custody or spousal support, a divorce is considered contested. It is the most complicated type of divorce, as a couple will need to go through numerous steps to finalize their divorce. Since contested divorces often go to divorce court with a judge, having legal representation during the trial is crucial.
How is spousal support or alimony calculated
There are numerous factors considered when a judge is determining how much and how long alimony should be paid. Some of those factors include the earning capacity of each spouse, how long the marriage lasted, the standard of living during the marriage, each spouse’s health and age, marital debts and property, and the sacrifices each spouse made during the marriage (such as staying at home with the children so the other spouse could work).
Who pays child support and how is child support determined
The noncustodial parent will be responsible for child support if the court determines it is necessary or parents come to an agreement to be approved by the court. The factors used to determined child support include the income / earning capacity of each parent, the number of children shared, each parent’s expenses, child care expenses, and other related issues.
How is property divided
California is a community property state. That means each spouse is given 50% ownership of the property accumulated during the marriage. This can include homes, vehicles, art, checking accounts, retirement / pension funds, small businesses, and other valuables. Items, accounts, or valuables that were kept separate throughout the entire marriage may be considered separate property and are therefore not subject to property division laws.
How long does it take for a divorce to be final
This can depend on a number of factors, such as whether it is a contested or uncontested divorce. Even if a divorce is uncontested, there is a six-month waiting period in California for the judge to grant a divorce. Likewise, those seeking contested divorces must wait six months for a trial to be ordered. How quickly a divorce is finalized will also depend heavily on how easily spouses agree on matters such as child support, property division, alimony, child custody, and other important matters.
Why should I hire a family law and divorce attorney
Going through a divorce or family law dispute can be complicated, confusing, and emotional. Regardless of whether spouses or family members think they are on the same page, having an attorney who is looking out for the best interests of the client can be invaluable. When you hire an attorney, you can have peace of mind knowing your rights and interests will be protected throughout the process. It can also take a great burden off your shoulders during a volatile or emotionally challenging time.
With more than 70 years of combined experience, our divorce and family lawyers are compassionate, caring professionals.
e understand how challenging family law disputes can be, whether involving a heated child custody battle or a complex divorce. As a firm with an AV Preeminent® rating and a 10.0 Superb Avvo rating, we are committed to maintaining a standard of excellence in our representation. Why? Because we know that your family and your future is on the line. When you retain us, you are getting understanding, knowledgeable advocates on your side.
With over seventy years of collective insight, we are well-versed on handling even the most complex family law issues in California, from grandparents’ rights to domestic violence and restraining orders. When you need a compassionate family law attorney that you can trust to have your best interests in mind every step of the way, turn to our firm.
Our legal team strives to secure a favorable resolution as quickly as possible—whether in or out of court. Call us now at (909) 315-4588 to schedule your consult.
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