Common Tax Questions in a Divorce
Posted Feb 8, 2022
If you are contemplating filing for divorce or are in the middle of a divorce, you may have concerns about tax implications. Here are some common questions regarding taxes that arise in a divorce:
- What is the tax impact when dividing assets? If property is transferred to me as part of a divorce, do I need to pay capital gains tax? There are no capital gains or loss recognized on transfer of property between spouses or to a former spouse if the transfer is incident to a divorce. IRC § 1041(a).
- What is the tax basis of property transferred to me from my spouse in a divorce? The tax basis of the property received from your spouse is the same as your spouse’ (transferor) adjusted basis. IRC § 1041(b).
- If my marital or family home is sold as part of the divorce, will there be capital gains tax? An individual may exclude from income $250,000 of any gain or $500,000 if status is married filing jointly. IRC § 121(b). The home must have been used as the primary residence for at least two years over the past five years, and there cannot have been more than one such sale within the preceding 2 years. IRC § 121(b). If one spouse moved out of the home, at separation or during pendency of the divorce, the home can still count as the primary residence as long as the other spouse continues to primarily reside there. Many people do not realize any gain; however, if they do, it would only be on the amount exceeding the exclusion.
- Do I need to pay taxes on child support and spousal support that I receive? Child and spousal support are neither tax deductible by the payer nor tax includable to the recipient. It comes out of post-tax dollars. For spousal support, this applies for divorces after December 31, 2018.
- Can I claim my children on my tax return during or after a divorce? The federal tax code generally allows the custodial parent to claim the dependency exemption for all children if there is no child support order in effect. However, parents can choose to share or transfer the dependency exemptions in the child support order, or the court may order the same. The custodial parent must sign a copy of Form 8332 for the noncustodial parent to attach to their tax return, if dependency exemptions are shared.
- If I file a tax return during a divorce, what is my filing status? You can choose to file married filing separately if you are not yet divorced by December 31st. Even if you have a signed separation or settlement agreement, your status is still married filing separately, until you are legally divorced. However, there are times when there are advantages to a divorcing couple to file jointly or to time finalization of a divorce to be able to file jointly. It is always prudent to consult with a divorce attorney before choosing to file separately or jointly as there may also be other implications in the divorce case
It is always recommended to consult with a CPA about tax issues in a divorce, and it is common for us to work with a client’s CPA for their benefit.
To learn more about tax issues in a divorce, please contact Beresford Booth’s Family Law Group at info@beresfordlaw.com or by phone at (425) 776-4100.