The choice to end a marriage is rarely easy. Even if a couple is in agreement about the divorce, and both spouses are willing to work together to split amicably, there are numerous issues that will need to be addressed during the divorce process. Some of the most complex issues will be related to the division of marital property, and in addition to determining how ownership of different assets will be addressed, a couple will need to understand how these decisions will impact them financially. Tax-related issues can have a significant impact on both parties’ finances after the divorce is finalized. It is important to carefully consider all tax-related issues when negotiating a divorce settlement to ensure that future financial complications can be avoided. Some tax considerations that couples may need to address during divorce include:
Filing Status
Generally, married spouses who file their taxes jointly have lower tax rates than those who file separately. Because of this, it may be beneficial for a couple to continue to file taxes jointly while they are still legally married. A couple who finalized their divorce on or before December 31 of a given year cannot file a joint return for that year. However, if the couple is still legally married on December 31, they can file a joint return. This may result in savings for both parties. In these situations, it will be important for a couple to understand how any tax refund they receive will be divided or who will be responsible for paying any taxes that are owed.
Tax Deductions and Credits
For parents who are going through divorce, one of the most important decisions to be made relates to which parent will claim children as dependents for tax purposes. Only one parent may claim a child as a dependent, which will allow them to receive tax credits and reduce the amount of taxes they pay. In many cases, the custodial parent—the parent with whom the child resides for more than half of the year—will be able to claim the child as a dependent. However, parents may agree to other arrangements. If parents have multiple children, each parent may claim one child as a dependent. Parents may also agree to alternate claiming one or more children as dependents each year. Parents should also be aware of other child-related tax credits they can claim, such as credits for childcare expenses.
Retirement Accounts
In some cases, retirement accounts or benefits owned by spouses can pose tax-related issues during divorce. Accounts such as 401k’s or IRAs may be divided between spouses. However, due to the tax-deferred nature of these accounts, withdrawals before the account holder reaches retirement age may result in taxes and penalties being applied. To avoid this, a Qualified Domestic Relations Order (QDRO) can be used to make tax-free withdrawals and transfers. QDROs can be complicated, and spouses will want to be sure to work with an attorney who can ensure that they are created and executed correctly.
Contact Our Milwaukee, WI Divorce Lawyers for Tax Issues
The divorce process can be challenging, and it is essential for spouses to understand the legal and financial issues they will need to address. At GRGB Law our Milwaukee divorce attorneys can help you navigate the legal complexities and the financial concerns that will affect you as you work to dissolve your marriage. We can advise you on what tax issues you will need to address, and we can also work with financial experts to ensure that these matters will be handled correctly. To set up a free consultation, contact us today at 414-271-1440.
Sources:
https://www.bnymellonwealth.com/insights/eight-critical-tax-considerations-for-divorcing-couples.html
https://www.forbes.com/sites/heatherlocus/2022/05/20/critical-tax-facts-in-divorce/
