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What are the tax implications when considering divorce?

Getting a divorce has an impact on almost every aspect of a person's life. The tax-related consequences are significant, and, when considering divorce, both parties may want gain the necessary knowledge in order to avoid being caught unaware. It may be beneficial to utilize the guidance of an experienced California divorce attorney to discuss tax implications and work on a plan to lessen the tax obligations that will be faced by both parties.

Couples who were not divorced at the end of December may file a joint tax return; however, if the divorce was finalized before the end of December, they need to file separately. A parent who has had his or her children living with him or her for at least six months may file as head of a household, which allows access to the tax benefits of that status. However, divorcing couples are allowed to decided for themselves about which parent will claim the children as dependents. 

If spousal support is part of the divorce decree, the person paying alimony can claim it as a deduction, while the one receiving alimony will be taxed on it. Alternatively, the spouse who pays child support will be the one taxed on that income. When one spouse is ordered to give the other a percentage of his or her 401(k) investment, it may be transferred by means of Qualified Domestic Relations Order (QDRO). By using a QDRO, the funds will not be taxable for either spouse. However, if the funds are withdrawn, the person withdrawing the funds will face penalties for early withdrawal and the funds will be counted as taxable income.

Couples in California who are considering divorce may want to choose the appropriate time to sell the family home. If it is sold while the couple files joint tax returns, $500,000 of the proceeds will not be subject to capital gains tax, while a single filer will only be able to shelter $250,000. If both parties retain ownership of the home after a divorce, the tax deduction based on mortgage interest will be split between the former spouses. If ownership is awarded to one party, that person will claim deductions for the interest, regardless of which party pays the mortgage or who resides in the home.

Source: Forbes, "Getting Divorced? 8 Things You Must Know About Taxes", Emma Johnson, Jan. 19, 2015

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Victoria S. Linder Law Office
5303 Folsom Boulevard
Sacramento, CA 95819

Phone: 916-905-4805
Fax: 916-498-0127
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