Divorce is one of the biggest financial decisions of a lifetime. All assets and debts that accumulated during the marriage will be divided. Parenting time and expenses for children will be set. These decisions impact each party’s financial outcome and holds tax implications for both parties. Having a tax advisor guide you through the divorce process helps avoid any surprises come tax season.
Real Estate. Some of the tax implications that arise from marital property divisions include potential for capital gains if selling the residence, itemizing mortgage interest, and any applicable tax credits for energy saving upgrades to the property. This is especially relevant if you and your ex-spouse itemize your federal tax returns. A tax advisor can assess how you will benefit from either keeping the marital residence, having your ex-spouse refinance and pay you equity, or selling the house.
Children. Children are already one of the biggest points of contention in divorce. Who has primary custody or if there is shared custody it dictates everything from where the children will attend school, what activities the children will be involved in, and how often the children will interact with both parents. Add in the fact that there are major impacts on taxes when it comes to custody and everything gets a little murkier.
The first issue that arises with taxes and custody is who claims the children. If one parent has primary custody, typically that parents claims the children. If there is shared parenting, then the IRS will turn to “tie-breakers” to determine who claims the children for tax purposes. You and your ex-spouse could also agree on who claims the children in a way that does not directly follow the IRS rules. A tax advisor can walk you through all of these variables and how different issues such as claiming dependents, the child tax credit, the childcare credit, and itemized medical expenses for the children will play into your tax picture. Having this knowledge before beginning settlement discussions or going to Court will help you understand how each issue plays a role in the ultimate outcome of the divorce.
Retirement Accounts. If part of the property settlement that is agreed to or is ordered by a Judge requires a division of retirement accounts a Qualified Domestic Relations Order (“QDRO”) will be entered by the Court to make that division possible. The QDRO will set out the terms and conditions of the division and it will address the tax implications of how the division is made. A tax advisor will be able to walk you through the process of deciding whether it is in your best interest to have retirement funds transferred or if one party should make a withdrawal for a cash payout (this is rarely done). Retirement accounts often carry the biggest tax consequences and it is in your best interest to know all your options before settling on the division of retirement assets.
State Specific. South Dakota is one of the rare states that does not have state income tax and therefore does not require a separate state tax filing. If you live in Iowa, Nebraska, or Minnesota, or any other state that has a separate state tax filing, an advisor can direct you on how the different aspects of divorce will impact your taxes on a state and federal level.
There are many emotional aspects to a divorce and the financial impact can be one of the biggest emotional triggers. Having a tax advisor in your corner to help you review, analyze, and assess your financial situation before, during, and after the divorce helps keep your peace of mind.
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