Tax Planning in Divorce in Texas
ATTORNEYS IN DALLAS
Jointly owned property, such as real estate, divided as a part of divorce generally will not incur any tax consequences when such transfer is incident to divorce.
Tax Planning in Divorce
When deciding to initiate divorce proceedings, individuals typically reflect and carefully consider their options. While there can be many reasons for choosing to terminate a marriage, it is vital to contemplate the various ways in which this decision will impact other aspects of life, such as finances. It is important to keep in mind that both the distribution of marital assets and a support order can potentially affect your tax status.
Tax Implications of Support Obligations
When filing a tax return, it is required by federal law to report all income earned. It is important to note that child support payments are not considered taxable income for the parent receiving the payments nor can they be deducted from the gross income of the parent making the payments, regardless of the number of children covered under the support obligation. In contrast, spousal support payments have historically been viewed as taxable income for the party receiving support and deductible from gross income for the party making the payments. However, changes in the federal tax law state that spousal support payments made after a divorce finalized in 2018 or later will not be considered taxable income for the recipient nor deductible from the gross income of the payor.
Important tax items to consider during the divorce process in Texas:
- Determining the Appropriate Tax Filing Status;
- When and Where to File the File & Finalize the Divorce;
- Tax Credits, and Who May Use Them;
- Tax Treatments of Alimony or Spousal Maintenance;
- Transfer of Property and Tax Consequences;
- Tax Carryovers; and Division of Retirement Assets.
Filing Tax Returns during Divorce
When divorcing, it is not possible to file a joint tax return for the year. Therefore, during tax planning, it is crucial to determine whether to file taxes jointly or separately. If you file separately, you will be solely responsible for your individual tax obligations to the IRS, without sharing the responsibility for your estranged spouse's tax obligations. Nevertheless, filing separately may lead to a higher tax rate and prevent you from claiming specific deductions.
It is also vital to establish who can claim a child as a dependent on their tax return if you and your spouse have a child. If no court order specifies who can claim the child, and you cannot agree, typically the parent with physical custody of the child for the majority of the time can claim the child.
Tax Implications of the Distributions of Marital Assets
When divorcing couples jointly own property, such as real estate, there are generally no tax consequences if one spouse transfers the property to the other pursuant to their divorce agreement. However, if the marital home is going to be sold, it may be more advantageous to do so before the divorce is finalized, as most married couples are eligible for a greater capital gains exclusion than single individuals.
The taxation of retirement funds from a 401K or pension that are being divided between divorcing spouses depends on the manner in which they are distributed. It is important in most cases to have a qualified domestic relations order to define each party's tax obligations and prevent any need to pay taxes in connection with the division of the retirement plan.
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At Wilson Whitaker Rynell, our attorneys possess the expertise and experience necessary to evaluate how various tax planning options in divorce may impact your tax situation, and we can assist you in determining the most advantageous course of action for your individual circumstances. Our firm represents clients in divorce cases in various Texas cities, including Dallas, Austin, Houston, Fort Worth, and all cities within Dallas County, Tarrant County, Collin County, and Denton County.
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