When filing for divorce, many people are aware of the common financial ramifications, including: property division, child and spousal support, and healthcare coverage changes. The impact of a divorce on the parties’ taxes, however, is often overlooked or misunderstood.
Divorce may affect your tax situation in a number of ways. The right to claim a dependent child will affect the amount of money owed or refunded at the end of the year. There may be money owed to the IRS from the sale of marital property, such as a house. Additionally, there are important things to know about the tax consequences of child support and spousal support payments.
Child support payments are treated as if they have no tax consequence: they are not taxable to the payee, nor are they deductible for the payor. However, spousal support typically is treated as income for the payee. As such, the payee generally must pay taxes on the spousal support payments received and the payor is allowed to deduct the money paid.
A more severe tax consequence may occur years after a couple divorces. Many married couples file their tax returns jointly. This means that each spouse has both individual and joint liability for any taxes owed for that tax year. In many cases, one spouse handles all of the finances for the household, including the taxes. If that spouse makes a mistake on the year’s tax return or purposefully claims less income than the household received, the other spouse is jointly liable for that error and any money owed to the IRS as a result.
The innocent spouse may have no knowledge that money was hidden or that the returns were done incorrectly. However, the IRS will still hold the spouse liable for the money owed unless a claim for “innocent spouse relief” is filed.
If you find yourself in a situation where the IRS is penalizing you for back-taxes owed from a year you were married and you had no control or knowledge of your financial situation at that time, you may be able to claim “innocent spouse relief.” A qualified attorney can assist you with reviewing your situation to determine whether or not you have a claim for “innocent spouse relief.”
Getting divorced is never easy. An experienced family law attorney will walk you through the process and ensure you understand the implications of divorce on all aspects of your life, current and future. For more information about the tax consequences of a divorce, please contact Banas Family Law for assistance.