One of the most complex issues that individuals need to confront in a divorce or legal separation is the potential tax implications of the change, especially with regard to the eventual division of your assets and liabilities. At Violet P. Woodhouse, APC in Newport Beach serving Huntington Beach, Irvine, and all of Orange County, an experienced divorce lawyer can help you address the important income tax questions you may face during your divorce. By taking certain precautions, you can save money and prevent potential future hassles.
One of the first steps to take to protect yourself during your divorce or separation is to obtain a tax estimate. Your accountant or tax preparer can determine the amount of income tax you would pay if you filed separately and the amount you would pay if you filed with your spouse.
Of course, you will want to file separately if doing so will allow you to save on taxes. In many cases, however, filing a joint tax return carries with it certain economic advantages. A married taxpayer may claim both the child and dependent care credit and the earned income credit only on a joint return. Additionally, certain deductions – such as dependency exemptions for a spouse or the deduction for spousal IRA contributions – are available only to joint filers. However, if you and your spouse are unable to agree on how to handle your taxes, file separately. Separate returns can be amended later if you change your minds. However, a joint return cannot be amended to file separately after the due date for that return. In the end, the question of whether to file jointly or separately is best answered by a professional who understands both the legal and financial complexities of your situation. At our firm near Irvine and Huntington Beach, a divorce lawyer can help you determine the most advantageous filing status.
Before deciding whether to file a joint return, you will need to determine how each of these factors will affect your tax bill:
In a joint return, each spouse is liable for 100% of the taxes due on the return as well as any penalties and interest assessed on it. If you believe that your spouse is not being honest in reporting income or claiming deductions, a divorce lawyer with our Newport Beach firm may advise you to file a separate return, even if it is otherwise to your economic disadvantage. Remember that with anything you keep as part of your settlement, you become solely responsible for the taxes due on all profits or gains produced by that asset from the time of its initial purchase.
In addition to claiming separate income, you and your spouse will need to report half of the combined community income, but you will each be permitted to take half of the joint deductions. Unfortunately, it may not always be clear whether a deduction is community or separate. The status of the deduction depends on whose money was used to pay the expense and the type of debt being paid. For example, if you paid an expense out of community funds, you must divide it equally and report half of it on each spouse's return.
Community property laws also affect exemptions for dependents. When community income is used for the care and maintenance of a dependent child, either spouse may claim the exemption, but it cannot be divided. In the case of two or more dependent children, you and your spouse may each claim a child as a dependent, but you may not divide a single exemption in half.
These are just a few examples of issues that can arise. At our Newport Beach firm serving Irvine, Huntington Beach, and neighboring communities, an experienced divorce lawyer can explain more fully the community property considerations for separate income tax filing.
Court-ordered spousal support is tax deductible for the payer and it is taxable income that must be reported by the recipient. However, child support is neither deductible nor taxable. Learn more about child and spousal support.
At our Newport Beach firm serving Irvine, Huntington Beach, and surrounding areas, an experienced divorce lawyer and Certified Financial Planner can provide the professional legal and financial guidance that you need to make an educated decision regarding income tax matters related to your divorce. Contact Violet P. Woodhouse, APC to learn more or to schedule a consultation with one of our family law attorneys.
Contact our firm near Irvine and Huntington Beach to consult with an experienced divorce lawyer who can help you understand important tax considerations during your divorce.
Violet P. Woodhouse, APC
Newport Beach, CA
2 Corporate Plaza
Suite 250
Newport Beach, CA 92660
Phone (949) 640-8861
Fax (949) 640-8862