The April 15 deadline is now past, but it can still remind couples planning to divorce that they need to be strategic about their tax obligation. The year of the divorce will be the final time that (unless they already filed separately) they will file jointly. The division of assets and debts is one of the most important details in a divorce, so it can be a significant misstep for the couple not to consider their tax obligations for that year and the ones to follow. It is especially crucial for business owners and those in high-income brackets.
Family law attorneys will discuss tax issues as a matter of course as they guide their clients through the divorce process. The goal is not to avoid paying taxes but to avoid paying unnecessary taxes when the couple reconfigures its taxes.
4 tax issues couples typically face
To not weigh these options could mean, at worst, unexpected penalties and expenses:
- Capital gains: The sale of the family home or other significant assets can lead to capital gains taxes.
- Dependent exemptions: Both cannot claim the kids, and it generally makes sense for the spouse who earns more to claim them.
- Post-divorce spousal maintenance recapture: The IRS now allows the payer to claim a deductible and requires the spouse receiving maintenance (alimony) to pay taxes on it.
- QDROs: Qualified domestic relations orders involve retirement accounts, pensions and other benefits that help maximize tax benefits.
What about tax evasion?
One spouse may make some bad decisions or attempt to hide money, leading to penalties and future issues for both spouses. However, the IRS does offer innocent spouse relief, and they can negotiate equitable relief or tax liabilities.
Don’t rely on luck
Some couples get lucky, but they are much better off working with an experienced divorce attorney who takes tax issues into account when negotiating a divorce agreement. They can also help couples identify potential issues they may not have previously considered.