Tax Issues in Your California Divorce
Divorce involves a number of considerations beyond simply choosing which party keeps the house and which takes primary custody of the children. Divorce will alter your day-to-day life, as well as your financial circumstances. When approaching divorce, it is vital to consider all financial implications, including the tax implications of the divorce generally and of how specific issues are resolved.
At Blasser Law, our experienced, knowledgeable, and capable Claremont divorce lawyers will advise you on all of the tax consequences of divorce. We will ensure that you know the tax implications of various matters before and as they are being resolved so that you can approach negotiations from the strongest position possible, and find resolutions that best serve your interests. Talk to the dedicated divorce attorneys at Blasser Law today to discuss the specifics of your case.
Filing Jointly vs. Separately
The overarching tax issue after divorce is adjusting to your new tax status as an individual filer. There are several tax consequences to filing individually, including the types and amounts of deductions available, income tax bracket, and claiming children as a dependent. Married couples are granted significant tax benefits not available to single filers. Talk to a seasoned divorce attorney about the tax consequences of filing separately to make sure you are prepared to adjust your lifestyle or move around your assets as necessary to adjust to the new filing status.
It’s also important to consider when to begin filing separately. Married couples can choose whether to file jointly or separately, even after filing for divorce. Parties can continue filing jointly until the divorce is finalized, although that will involve dealing with and relying on one another each tax season until the divorce is concluded. If the parties can set aside their differences and work together (or rely on accountants and other agents to handle things), it might be advantageous to do so. The parties could, however, disagree on certain factors relevant to taxation, such as homeownership.
Taxation of Spousal Support
Before the Tax Cuts and Jobs Act of 2017 (TCJA), payers of alimony/spousal support could claim alimony payments as a deduction. Recipients of child support then had to report alimony payments as income. This served to incentivize higher alimony payments and reduce fights over alimony during divorce; paying more was actually advantageous for higher-earning individuals.
The TCJA changed the game. Spousal support payments for any divorce finalized from 2019 onwards are tax neutral. The recipient does not report spousal support as taxable income, and the payer does not benefit from any deductions for paying. If the support obligation was established prior to 2019, then the old rules apply.
California continues under the old regime. Spousal support is taxable income in California for the recipient, and payers of spousal support can deduct payments from their gross income. Your California divorce attorney can help you understand the tax consequences of your support award depending on when your divorce was or will be finalized.
Taxation of Child Support
Unlike spousal support, child support is tax neutral. The payer cannot claim a deduction and the recipient does not need to report child support as income.
Who Claims the Dependents?
Claiming a child as a dependent is an important and advantageous tax benefit incidental to having children. Divorce, unfortunately, complicates the matter. Only one party can claim a given child as a dependent and secure the relevant benefits. When a married couple files jointly, there’s no issue. When the parties file separately after divorce, the parties will need to decide which parent claims which child for the tax credits.
There are many ways to resolve the issue, depending on each family’s circumstances. If both parents are income-earners, for example, and there are an even number of children, then the parties could agree to split the dependency credits. If there are an odd number of children, the parties could agree to alternate years claiming the last child as a dependent. If one party is the primary income-earner and the other party expects to have greater custody rights, then the custodial parent could agree to relinquish the tax credit, allowing the higher-earning parent to take the tax credit and pay more in child support. Talk to your California child custody and tax attorney about how to negotiate the most optimal arrangement with your former spouse.
Transfer or Liquidation of Property, Retirement Assets
Divorce may involve transferring the title of property from one spouse to the other, such as title to the family home. Simple transfer of property in a divorce typically does not trigger taxation. However, there may be circumstances under which liquidating the asset–for example, selling the house and splitting the proceeds–makes the most sense for the divorce. There may be advantages to structuring the transfer as a “true sale” to one party even aside from liquidation. These events can trigger certain tax consequences, which must be kept in mind when negotiating a settlement.
Transferring retirement assets is a more complex procedure. Pensions, 401(K)s, IRAs, and other non-liquid assets such as brokerage funds may trigger tax consequences depending on how they are conducted. Some can be transferred tax-free with a certified divorce decree, while others may require a Qualified Domestic Relations Order to avoid tax penalties. You need a seasoned divorce attorney familiar with complex assets to ensure that you protect your wealth and avoid unnecessary taxation.
Call Blasser Law in Claremont for Experienced and Qualified Divorce Lawyers
If you are considering divorce, it is vital to choose an attorney with a comprehensive understanding of the financial and tax implications. At Blasser Law, we are ready to advise you not only on how to protect your interests, your assets, and your family, but also on how to best position yourself for the financial consequences of divorce. In Los Angeles, call Blasser Law at 877-927-2181 to speak with a knowledgeable and effective California divorce attorney.